[00:02:40] Intro: You are listening to Millennial Investing by The Investors Podcast Network, where your host Robert Leonard interviews successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

[00:03:02] Robert Leonard: Welcome to the Millennial Investing Podcast. I am your host, Robert Leonard, and on today’s show, I am joined by Perth Tolle. Welcome to the show, Perth.

[00:03:05] Perth Tolle: Thanks for having me.

[00:03:20] Robert Leonard: I got interested in your work from reading your articles online, and I want to start today’s show by talking about your background a little bit, I was hoping you could share a bit on how your experiences in Beijing and Hong Kong led you to explore the relationship between freedom and markets.

[00:03:28] Perth Tolle: Sure, thank you. So, I grew up in both China and the US. I was born in Beijing, lived there until I was about nine years old, and then moved to the US, traveling back and forth throughout my childhood.

[00:03:38] Perth Tolle: After college, I went and lived in Hong Kong for about a year, during which time I traveled to the mainland, to Beijing, Shanghai, and Shenzhen often. And that’s when I first really opened my eyes to the impact of freedom in my life and also in the markets in these various places: US versus Hong Kong, at the time versus the mainland. For example, I had a friend in Shanghai whom we called Maggie.

[00:04:03] Perth Tolle: At this time, I was around 23 and 24, and she was the exact same age as me, just like all of my American friends in every way, except Maggie didn’t exist on paper. She has no birth certificate, no school records, no social security benefits—she just doesn’t exist on paper. And that’s because she was born the second child during the one-child policy era, which defines the culture of my generation in China and has also led to the worst demographics in the world and 30 million missing women in the country, according to official Chinese think tank estimates, although some have it as twice that.

[00:04:34] Perth Tolle: So Maggie’s one of the lucky ones. She’s not one of the missing women, but she, you know, doesn’t exist. On paper. So I realized, wow, that could have been me. And these policies and the governance in a country have a huge impact on the future of a society and its markets. So that’s when I started to first explore the relationship between freedom and markets.

[00:04:55] Perth Tolle: And when I came back to the US, I worked at Fidelity as a financial advisor in the LA and Houston markets. And I had a lot of clients, you know, like I had a Russian client who told me, “Hey, I don’t want to invest in Russia because it would be like funding terrorism.” And I felt the same way about China, a lot.

[00:05:12] Perth Tolle: And so I wanted to create a way for investors who always have an emerging markets allocation to be able to fill that allocation without funding autocracies.

[00:05:23] Robert Leonard: I want to get into these freedom metrics a bit more. Talk a little bit more about what metrics you’re looking at and how your indexes in total would differ from just investing in a total emerging markets index.

[00:05:36] Perth Tolle: Sure. So, we are looking at freedom metrics that encompass both personal and economic freedoms. And we get our data from third-party think tanks that use quantitative variables. So, we’re using data from the Cato Institute and Fraser Institute. They have a Human Freedom Index and dataset, which has 83 variables across the spectrum of both personal (civil and political) and economic freedoms.

[00:05:59] Perth Tolle: Examples of civil freedoms include things like terrorism, trafficking, torture, wars (whether it be invading other countries or internal organized conflict). Women’s freedoms are also part of this, and there are five proxies for women’s freedom, such as women’s freedom of movement, women’s rights to inherit, women’s rights to children after a divorce, and so on.

[00:06:20] Perth Tolle: Political freedoms encompass freedom of expression, freedom of speech, media freedom, freedom of religion, freedom of assembly, civil procedure, criminal procedure, judicial independence, and more. Economic freedoms cover areas we are more familiar with, such as taxation, business regulations, freedom to trade internationally, the ability to hire, free trade, soundness of the money supply, and addressing inflation. This is extremely important in order to mitigate inflation and currency risk. These are the aspects we are looking at. We take the Composite Country score given to us by the Cato and Fraser Institutes, and we derive our country weights based on those scores.

[00:07:01] Robert Leonard: So are there any countries then that just do not make the cut at all?  Like they just don’t make it into your index? And if so, which ones are they? 

[00:07:09] Perth Tolle: The freedom weighting algorithm actually naturally excludes the worst autocracies. So the worst scoring countries like China, Russia, Saudi Arabia, Egypt, Turkey, and the UAE, those don’t make it into the index at all. Therefore, we have zero allocation to China, Russia, Saudi Arabia, and so forth, and that’s been the case since the inception of our strategy when it became publicly traded in 2019.

[00:07:32] Perth Tolle: So we were able to sidestep both the various crises in China over the last few years. And also the Russian invasion of Ukraine. So we’ve been fortunate in that in these very extreme kinds of black swan events, which the emerging markets are full of, we’ve been able to come out unscathed, so to speak. Our investors have been able to kind of sidestep those risks.

[00:07:55] Robert Leonard: One of the big differences that came to mind is the waiting of Chinese equities and how that potentially impacts returns of the typical ETF or index compared to yours. We can get into how Chinese equities have outperformed and underperformed. We’ll get into that a little bit later, but I’m wondering how your returns have stacked up compared to just the total emerging market index?

[00:08:19] Perth Tolle: Yeah, since inception, we have seen stark outperformance compared to the MSCI Emerging Markets Index. Let me just look up the numbers here. It’s extremely, extremely stark at the moment, and we aim to serve as a scorecard, a running scorecard for freedom in the emerging market space.

[00:08:38] Perth Tolle: Since inception, our strategy, the Freer Emerging Markets strategy, is up 27%. On the other hand, the BEM, which is based on the MSCI Emerging Markets Index, is up 7%. This performance is measured since May 2019. If you examine the one-year, three-year, and year-to-date periods, they all tell the same story of freer markets tending to outperform. However, I wouldn’t expect this level of performance every year.

[00:09:02] Perth Tolle: So, everyone that I share this with, I would want to emphasize that we had some very extreme events in the past several three and a half years or so. We had Covid, we had the China Tech crackdown. We had founders being disappeared, and that’s still happening today. Just these kind of black swan events that really show the value of a freedom-weighted strategy. But also, I wouldn’t expect to have these events every year. So now there’s always something in emerging markets, but it is a very stark outperformance story right now.

[00:09:32] Robert Leonard: We’ll get into the top countries in the freedom-weighted metric in just a minute. But before we do, I want to touch on this article that you wrote on the four main elements of autocracy risk for investors in countries under authoritarian rule. So I was just hoping you could talk a little bit about these risks and how they can affect companies and investors in practice.

[00:09:54] Perth Tolle: Yeah, so the article that I did for Barron’s does talk about these types of risks, and I wrote that article after Covid Zero and then the protests happened. So it was extremely heartening and encouraging for me to see the protests happen without immediate reports of a crackdown on the protestors when they were protesting against Covid Zero in cities like Beijing, Shanghai, and a lot of other cities across China. I don’t know if you remember this, but it only happened very briefly afterward. There was a crackdown on the people that they could find who were present at the protest, and it was kind of set off by this fire that happened due to, and then due to Covid Zero. People died because the firefighters couldn’t get through to the properties.

[00:10:54] Perth Tolle: So when that happened, everyone was asking, “Hey, is this a sea change in China? How encouraged are you by this as an investor?” It changed nothing for me as encouraged as I was, you know, for me to see that. And I think it was a flicker of hope at that time, but it didn’t change any of the fundamental risks of investing in authoritarian countries. One of those risks is misplaced priorities, which means companies in China, for example, and in other autocratic regimes have to put the state’s interests before everyone else’s interests, so before the interests of their shareholders, before the interests of their customers, sometimes. As an example of that, Tencent, who owns the WeChat app in China, WeChat has been used by the government to crack down on dissidents and Uyghurs for a long time. And even in the latest Congress that we saw this weekend in China, data security was a big issue. And that just means by data security.

[00:11:37] Perth Tolle: I mean, the government wants access to all the data that these companies have, and that is used to, you know, often crack down on citizens who may disagree with the government. And Tencent has to hand over this data, whether it’s in the best interest of their customers or not. And some of their customers will be detained, jailed, or worse because they’ve handed over this data. But they have to do that because they have to put state interests above all others, whether it’s in the best interest of their customers or their shareholders or not. There’s also the capricious government interference risk, where the government can come in overnight and say, “Oh, by the way, you are no longer allowed to participate in your core business activity. You are no longer allowed to raise capital overseas. You are no longer a for-profit company. Now you’re a nonprofit.” So all this happened in China in the last year and a half or so. Didi had to take their app down from the app store and say, “We can’t accept any more new customers” because they tried to have an IPO overseas and apparently didn’t get approved and did it anyway. 

[00:12:38] Perth Tolle: That did not turn out well for them. Education companies in China were told that they were nonprofits overnight. Friday night, stroke of a pen, “You’re nonprofits now.” That’s not something that shareholders can recover from. So these types of things, and right now tech is still a main area of crackdown in China. You can see the BFA, the tech deal guy who is currently disappeared and detained for political purposes, and he had a hand in every big tech deal in China. So it’s a very real risk of heavy-handed government interference in private market activity, but it’s not just China. You also see what happened with Russia. Sanctions risk, right? If you invade another country, your market could be marked to zero due to all the ramifications of that. So all of these risks are still very present in China, despite the very short-lived protest that happened that kind of ended Covid zero, which is great. But as an investor, none of these risks have changed.

[00:13:38] Robert Leonard: I want to touch on the risk of being nationalized. You mentioned that they could be, and a company could be restricted from their core activities, or I guess at the very extreme nationalized. How does that work and maybe what’s an example of a company that has been nationalized? 

[00:13:53] Perth Tolle: So I’m going to use a non-China example for that. Very recently in Egypt, the biggest dairy company in Egypt, the government said, “We want to nationalize this company.” The founder said no and got thrown in jail, and his son also said no and was thrown in jail as well. These are the types of things that happen in the emerging markets space because the emerging market space is just so full of autocracies and companies just coming out of autocracies.

[00:14:18] Perth Tolle: In a situation like that, basically the government takes over ownership of the company and operations. Something similar happened in China that I can point to is SIC, the semiconductor company in Shanghai. This is a company that was founded by expat Americans who are actually from Taiwan, and they went back to China and founded this company. It’s controversial, and TSMC alleges that they stole a lot of the IP from them, and indeed, SM did lose a lawsuit regarding that. TSMC won that suit alleging the IP theft. But in the end, what happened with this company was it was basically taken over by state appointees, and the founder has now been run out, and it’s essentially owned and operated by the government and its appointees. 

 [00:15:11] Perth Tolle: And so that caused a company to become a lot less efficiently run. In our opinion, we do exclude state-owned enterprises now in certain of these countries like China or Egypt, but a lot of non-state-owned enterprises are essentially state-run as well, like SMIC. So that’s one of the tail risks when you’re investing in these autocratic regimes.

[00:15:28] Robert Leonard: What happens to shareholders when that happens? What’s the process like?

[00:15:32] Perth Tolle: Well, in that situation with SMIC, of course, their share price has declined drastically. They ended up kind of re-IPOing on the Starboard, which is the Chinese exchange. So they did have another IPO, and it did pop on that IPO. IPOs on the Starboard tend to pop on their initial trading because of state support. So a lot of these companies do depend on government support to operate, and we just don’t think that is the most efficient way to operate companies or to have sustainable growth. The freer markets tend to have more sustainable growth that’s not state mandated or debt-driven. They tend to recover faster from drawdowns, as we saw in the recovery in 2020.  And they tend to use their capital more efficiently because they’re allocating that capital according to the needs on the ground and providing the best value for their customers instead of whatever the government is telling them to do.

[00:16:34] Perth Tolle: So you saw the smart car revolution in China a couple of years ago that was driven by government subsidies. Now, there are ways to invest in that and participate in that without direct autocracy risk. One of those ways is to invest in other emerging countries that have free trade. Chile has a lot of free trade with China. Chilean companies such as SQM pivoted from mining copper mostly to mining lithium for the batteries in these electric vehicles. And so in that way, investors in Chilean companies were able to benefit from the unfree market in China and their demand for electric vehicles due to government subsidies without autocracy risk by investing in Chilean companies like SQM. That’s what we try to do as well. We try to capture growth in emerging markets without direct autocracy risk.

[00:17:19] Robert Leonard: Another risk you talk about in your article is the different accounting practices that many of these regimes use, which lack international oversight. Because of that, the US has taken some measures over the last few years to crack down on these accounting inconsistencies, you could call them, to really try to protect investors from instances like Luckin Coffee where accounting just isn’t up to par, or at worst, and maybe this case was fraudulent. So it’s not necessarily happening right this second, but it’s happened over the last couple of years, so it’s still relatively recent. The SEC is cracking down on Chinese companies in particular. How do you see this affecting the future of investing in Chinese companies?

[00:18:00] Perth Tolle: Yeah, so Luckin is a very good example. Although it happened a while ago, when it happened, it made a big splash because it was so fraudulent and blatant. I think short sellers like Muddy Waters, for example, saw it coming a mile away, but nobody else did. In fact, I had family and friends in Asia who were talking to me about it, saying it was going to be the next Starbucks. Then, after the news came out that it was fraudulent and the stock crashed, there were still videos circulating on Chinese internet where people were making fun of Americans. They were saying things like, “Oh, look at these stupid Americans, giving their retirement money and free coffee to Chinese people.” It became a big running joke. And so, I think that is a really good example of how we sometimes as investors in very free markets and being used to the, you know, rule of law, the investor protections, the IP protections, the stronger institutions that we enjoy here in, whether it be New York or London or you know, other places that have very strong institutions, very free capital movement, and very high accounting standards that we project that same standard and optimism onto companies that are in, in places that just don’t have that. And so we are able to, you know, we buy into these great growth stories and oh, it’s the next Starbucks, but we don’t account for the difference in accounting, the difference in governance, in the place where that company operates.

[00:19:32] Perth Tolle: So when Luckin fell, the biggest holders in Luckin were not China funds, but rather emerging markets funds on an absolute basis. This includes funds like EEM, EMG, and VWO, which experienced the biggest decline. These investors were simply seeking broad emerging markets allocation and were not specifically targeting Luckin or Chinese companies. This is an example of the risks that can arise when investors are unaware and unprepared for such situations, which can be detrimental to broad emerging markets investors.

[00:20:14] Robert Leonard: I’m glad you brought up those specific funds too, because I think most investors are pretty familiar with those ones in particular for emerging market exposure. Do you have any insights or updates on where all of that is now? Do you think that this risk is still very apparent and some companies could end up falling out or wiping out of these indexes?

[00:20:34] Perth Tolle: Yes, I do. I think that is a risk, and I think that the bipartisan support for measures like this is gaining momentum. It used to be that, you know, when we first launched the fund in 2019, we were the only ones saying this in the, you know, kind of ETF space. Now, the tide has turned, and we no longer have to be as loud or as contradictory because everyone agrees that this is a problem, especially after Russia. So, in those funds and other kind of China funds or other emerging market funds that have high China concentration, most of these funds have taken steps by now to change to H shares of the same companies. So, let’s say you have a company that’s listed in the US as an ADR. The funds are in the process or have already changed to Hong Kong listing.

[00:21:19] Perth Tolle: So yes, this actually does help Hong Kong listings a bit. But if you are an investor who is owning, say, one of these ADRs that’s going to be delisted without being in a fund that’s making these transitions, then yeah, that’s something that is going to affect you, and it could be very bad. So usually, when a delisting happens, you can still sell, but the liquidity is going to be very narrow, there’s not going to be a lot of liquidity. So you’re probably going to sell at a very, very low price. So if you are an investor and you’re currently investing in Chinese ADRs that are on the list to be delisted in the next three years, I would prepare yourself for that by either transitioning to a fund that’s more diversified if you still want that exposure or selling while you can.

[00:22:03] Robert Leonard: Yeah, it’s  kind of crazy because big companies like Alibaba, they assured investors. They’re like, we will comply and, and get everything right, but it could be pure panic. Then if something happens in the news where they’re skeptical, like you said, the share price could crash and then investors won’t have a big window to get out in time, you know, just everybody knows. So yeah, it’s a big risk with companies like Alibaba. 

[00:22:26] Perth Tolle: So, that is a major tail risk that’s coming for these stocks. Now, most people are already aware of this, so hopefully, everyone is taking precautions. Now, the fund houses, I know for a fact, if you’re in a fund, that shouldn’t be a huge deal for you. It’s more going to be a problem for these companies that are listed. They’re not going to be able to raise capital in US markets anymore, and that’s going to be for them to deal with. But yeah, if you’re an investor and you have Chinese ADRs on this list, you should probably try to take cover.

[00:22:52] Robert Leonard: Would you say that Chinese companies have an incentive to stay on the American exchanges?  It would be pretty devastating for them to get kicked off, would it not? 

[00:23:02] Perth Tolle: Yeah, and you can argue that they should have known this the whole time, that this was a loophole created by American lawyers and American exchanges to make money off of these listings. And Wall Street greed can always be counted on to create these kinds of situations that, in the end, hurt investors.

[00:23:19] Perth Tolle: So I would say that yes, Chinese companies have a huge incentive to try to revamp their accounting standards to meet these listing standards, and the fact that they haven’t done so yet, the fact that this is still a debate after years of this delisting situation has already happened, after years of being listed on these exchanges, shows that for Chinese companies, their self-interest does not come first.

[00:23:45] Perth Tolle: That the interest of the state comes first. And if the state tells you, you know, our data is a state secret, which they do, that is a law in China. All company’s data is a state secret, and so therefore, it is impossible for these companies to abide by both Chinese law and American listing standards because American listing standards do say we have to have access to your data. So for them, it’s impossible to meet those standards. So yeah, I think that every company that’s currently listed in the US in China does want to meet these standards, but unfortunately, because they operate in an autocracy, they’re not able to do so lawfully in their own country.

[00:24:23] Robert Leonard: Wow. Yeah, I’ve never really heard it put like that before.  I guess I was just more on the optimistic side of things where I would just think they would do everything they could to, I guess, be in the SEC’s. Good graces. But that’s a very good point where it just might not be possible based on their own laws in their own country. So let’s get back to. The good way to invest in emerging markets is perhaps more efficient in a better way. You highlighted Chile, and I know Taiwan in a, in another article as a relatively free emerging market for investors to consider. What are the characteristics about these countries and just characteristics in general for good emerging countries for investors? 

[00:25:05] Perth Tolle: Yeah, so Chile actually last year has been one of the shining stars in the emerging markets performance as well because of their diversified commodities exposure. And this is a country that has less than 1% in most cap-weighted emerging markets indices. So you’re getting a very underallocation to Chile, in my opinion, if you’re only invested in cap-weighted emerging markets index funds. Now, the reason why we like Chile is because we do freedom weight, right? So their personal and economic freedom levels are very high compared to their peers in the emerging market space. So we’re looking at absolute freedom levels, both personal and economic freedom, compared to other emerging markets in the universe. And so Chile gets a high score because of that and, as a result, a high weight in our index. In addition, CHII has very free trade, so they actually do a lot of trade with China and we don’t penalize that. We believe that companies should be free to operate in a manner that they determine is best for their clients and their shareholders. And when they determine it’s best to decouple from China, they’re free to do that as well. So globalization, we believe, is alive and well. And it’s providing all the other options, you know, when you want to decouple from any particular country like China or Russia. So the countries that will benefit from that decoupling are the freer markets, the ones with stronger institutions, stronger rule of law, stronger personal protections, and stronger IP protections and investor protections.

These are the countries that the business will go to from the autocratic regimes. So we’re seeing countries like Chile, Taiwan, Mexico, even Indonesia. These are all countries that we are invested in that we believe are well-positioned to benefit from any kind of decoupling from China, and in fact, they already are. So you see Mexico really outperforming in the last year because of that kind of reassuring back to the US and countries that are geographically close to the US and have trade agreements with the US. So we do see that happening as a trend that’s not going away anytime soon.

[00:27:05] Robert Leonard: I know economic growth doesn’t necessarily translate into earnings per share growth, but do you factor in economic growth at all into your investment process? With India, for example, it was a hot topic for a while because it was just growing so rapidly. Does that fit into your investment process at all? 

[00:27:23] Perth Tolle: Yeah, it does, as a result of higher freedom countries having higher growth in general and more sustainable growth. So studies have shown, and we can use data from the Cato and Fraser Institutes. Fraser Institute actually shows the correlation between economic freedom and GDP per capita growth. Even things like, you know, freer countries not only have higher GDP per capita, but they have lower poverty rates. They have higher economic equality. Despite the higher growth, they have higher gender equality, lower mortality rates, lower infant mortality rates, higher life expectancy, and so forth. There are all these benefits to freedom that are kind of nebulous, but does it translate to stock markets? Well, if you look at stock markets in the very unfree countries, China, again being Exhibit A since 1992, which was the inception of the MSCI China Index, and that index is MCHI, the growth in that index is around 2%, so lower than treasuries during that time annualized. If you look at GDP growth during that time, it’s extremely high and consistently high. It’s like 7% a year in China. And though it was a really, it was a time of very real growth in China because they went from abysmal policies under Mao, which caused famines that killed tens of millions of people during the Cultural Revolution and the Mao times, to not so bad policies economically. And this incremental improvement in economic freedom allowed people there to come out of poverty. They raised themselves up out of poverty through the government basically stepping back and getting out of the way. And now we see those policies that made China prosperous kind of going in reverse, and we’re going, you know, there’s a lot of talk about this looks like the Mao times again, and we’re going in that direction. So, you know, heads of companies being disappeared very publicly, these are not good signs. And you know, crackdowns on whole industries, industries that made China’s name in the markets like tech. So this is not looking good right now in China. I feel like that is a growth story of the past, and by looking at freer emerging markets, we can find the growth stories of the future.

[00:29:37] Robert Leonard: How do you think the ongoing tensions between the US and China will impact the broader emerging market landscape in China and outside of it?

[00:29:48] Perth Tolle: Yeah, so I think the US-China relations, the way they’re going right now, is definitely not bullish for China specifically. However, because of globalization and a lot of free trade in some of these freer emerging markets, it’s going to benefit some of the other emerging markets in the alt-Asia space, like Thailand, Philippines, Indonesia, and Vietnam, which is a frontier market.

[00:30:12] Perth Tolle: So those markets are set to benefit from this in the alt-Asia space. I think other markets around the world like Chile, who has very free trade with China, Taiwan, South Korea, who have free trade and proximity to China, become alternatives as well for investors. And then countries like Mexico, who have very high proximity to the United States, and even India, which is not currently in our index but very borderline and could be included at any time.

[00:30:35] Perth Tolle: So there’s a, and even developed markets like Japan, Germany, and the US, who are getting kind of business from this reassuring that’s going on. You know, you see the semiconductor companies building plants in Arizona and Japan, Germany, so a lot of these other countries will benefit. I don’t think that the slowdown that’s exacerbated in China, that is exacerbated by poor US-China relations going forward, is going to affect the rest of the world. I think actually it’ll help the rest of the world. I think that’s going to be contained to China at this point, and that is actually, if I were Chinese in Chinese leadership, I would not want that. I would try to smooth over those relations as much as possible.

[00:31:15] Robert Leonard: Were those countries that you just listed then the ones that you were the most bullish on, that you think would be the best long-term opportunities for investors going forward? Or did you think about that a little bit differently? 

[00:31:27] Perth Tolle: No, absolutely. Those are the countries that I’m most bullish on, so especially the freer ones in the emerging market space: Taiwan, Chile, South Korea being the three big ones, and then smaller ones like Indonesia, Thailand, Malaysia, and the Philippines. So, these are countries that will benefit from the reassuring decoupling from China, but also even without that trend. These are the places we expect to find the growth stories of the future because they have the launch path for growth, which is the foundation of personal and economic freedoms that incentivize growth and innovation. So, these are the countries that we’re focused on. Anyway, the fact that there’s a lot of companies that are reshoring now and diversifying their supply chains does help these countries. But these countries are well-positioned to launch the next growth stories regardless.

[00:32:19] Robert Leonard: Yeah. It’s really interesting because a lot of those that you mentioned have a really small waiting time in the total market index. If you just go by an emerging market ETF on the topic of Taiwan, since that’s one of your top choices, how are you viewing the risks there with China and all of what’s going on right now?

[00:32:36] Perth Tolle: Yeah, that’s a great question. I’m glad you mentioned that. So, with the Russia-Ukrainian situation, we see that the aggressor, which is Russia, has the most autocracy risk and the risk of economic sanctions, market ramifications. And the autocracy risk lies with the aggressor. So, to emerging markets investors, I would say I would be much more concerned about China risk. Then Taiwan risk in that situation, if China invades Taiwan, not only will none of your investments be safe, not even the S&P 500 because we’re now in World War II, but China is going to be hit the hardest. And most emerging markets funds currently have 35% in China still. I mean, it was up to 41% in August of 2021. So, that is a much higher risk, in my opinion, than let’s say, you know, 18% in Taiwan. So, both our fund and EM or IMG are going to have between 14 to 18% in Taiwan, but they also have 30% plus in China. And I think that is the much bigger risk if you see an escalation of military tensions across the street.

[00:33:49] Robert Leonard: What do you see as some of the biggest trends or themes that are shaping emerging markets in the next few years? 

[00:33:55] Perth Tolle: So, it’s interesting because this is a millennial podcast, right? So, I think millennials, especially, are aware of the impact of their dollars. In emerging markets, there is no neutral. Your dollars are making an impact one way or another. You’re either funding the freer countries, the countries that are promoting freedom and peace across the world, or you are literally funding autocracies in the emerging market space.

[00:34:32] Perth Tolle: And so, I think millennials, we have a lot of millennial fan base because of this reason, because we realize that there is no neutral in emerging markets and the way that emerging markets funds are currently constructed in the cap-weighted funds causes this huge autocracy concentration. So, I think going forward, one of the biggest trends in emerging markets investing is going to be freedom weighting or some kind of variation on that. And we are already seeing some copycat funds getting spun off. So now it’s a category, and that’s great. You know, we welcome the competition because it’s such an important conversation to have and such an important type of strategy in this space.

[00:34:55] Perth Tolle: So, I think that’ll be a new trend. We do also see a lot of “Ex-China” funds coming out, and I think that is less useful. I think it’s a band aid on a problem that’s deeper. So, we don’t want to just exclude China, right? China is not the problem. It’s a lack of freedom in China for investors that’s the problem. So, for investors and their citizens, right? So, you know, we’re not excluding them arbitrarily or any other countries that we exclude. This is just a natural result of freedom weighting. And if they become more free, my goodness, that’s a great place to invest, and we want to put them back in. So, if they become freer than the average in emerging markets, we welcome them into the index, and that would be a great day because that would mean they have become more free. So, we’re going to see a lot of these “Ex-China” funds coming out. I don’t think that’s a great solution compared to freedom weighting, but I do see this trend kind of happening around the world.

[00:35:45] Robert Leonard: Yeah. It’s interesting because some data and some people talk about how millennials and the younger generation, gen Z are a bit more focused on values or incorporating their values into their investing. Maybe it’s because of ESG investing or these platforms that allow you to do this more frequently, but I was actually on Yahoo Finance the other day and I saw that there’s almost an ESG score. So it seems like it’s becoming more prevalent these days. 

[00:36:09] Perth Tolle: Yeah, or non-traditional metrics, right? So we did this, I mean, no one was using freedom as a metric. Now it’s a category. So, I think that millennials have a huge part to play there. And you know, being in a position to direct assets, whether it’s your own or other people’s, is a position of power and privilege. And I think millennials, more than any other investor base, realize this and want to use that power for good.

[00:36:32] Robert Leonard: For someone listening to this show who’s in the US or maybe even Canada, they might be thinking, why would I bother? Like they wanna diversify their portfolio, but why would they bother? Why shouldn’t I just, they might be saying to themselves, why shouldn’t I just stay in my home country? What advice would you tell this person?

[00:36:49] Perth Tolle: So, yeah. So first of all, I want to caution people who are not used to investing in emerging markets. This is much more volatile than typically developed market investing. And you don’t want to kind of, unless you fully understand what you’re getting into, you may not want to try it out. But if you are currently an emerging markets investor and you always allocate to the emerging markets, which all of the institutions always allocate to the emerging markets, I come from a Fidelity background, so at Fidelity, depending on the risk level of your portfolio, you always have between five and 20% in emerging markets.

[00:37:35] Perth Tolle: So, if you are one of those investors that always keeps an emerging market allocation and you want to do it in a way that captures the highest growth potential countries, which we believe are the freer emerging markets that serve as a launch path for growth, this is a good way to do it. And also, without funding autocracies, because a lot of people have been turned off from investing in emerging markets for that reason, because they don’t want to fund countries like China and Russia. Because, you know, another risk that we didn’t deep dive into today of investing in those countries is that your investments often directly benefit autocrats and their associates who have some kind of ownership in these companies. That is very murky because you don’t actually have transparency into ownership structures either. So, I think a lot of people are aware of that and don’t want to invest in emerging markets for that reason. But we have created a way for you to be able to participate in emerging markets growth without those autocracies and also with a higher allocation to the freer emerging markets.

[00:38:21] Robert Leonard: I know I was very confused when I first started investing about the ADR structure, and it’s just not transparent of what you actually own when you’re buying a stock in an emerging market company that has an ADR. That’s an ADR.

[00:38:36] Perth Tolle: Yeah, no, that’s absolutely the case. You don’t actually own the stock. You own, you know, kind of this holding company. So, that’s another structure that American lawyers created to basically make money off of these listings. So, again, the greed of Wall Street never fails.

[00:38:53] Robert Leonard: As we wrap up the show here, one last question for you. You’ve been named one of the hundred people transforming business by Business Insider in 2021. What are some of the initiatives or projects that you’re working on right now that you’re particularly excited about?

[00:39:09] Perth Tolle: So, we actually have a project that we’re working on jointly with the Human Rights Foundation called “Defund Dictators.” And you can go to defunddictators.org or defunddictators.com to check it out. It’s not completely finished yet, but you can see there that it’s a tool for the public to be able to check the dictator exposure in their emerging markets funds. This only works for funds that are ETFs listed in the US, and you can easily see, among other things, your data set and see how much dictatorship exposure you have. You can also easily see where that dictatorship exposure is and the degree of autocracy risk that you’re in. So, that’s something that I’m excited about. We did present this at the Oslo Freedom Forum last year, and we’ll probably be there again this year. We’ll also be presenting at several other conferences. So, we are excited about that project as a way to help investors have easy transparency into their dictatorship exposures. It’s a fun project on the side.

[00:40:11] Robert Leonard: That is very cool. Thanks for sharing, Perth. I’m going to check that out. And before I let you go, where can the listeners go to connect with you and learn more about everything that you do?

[00:40:22] Perth Tolle: Yeah, so our fund website is freedometf.com, and I am on Twitter @Perth_Tolle

[00:40:31] Robert Leonard: I will be sure to include links to all your resources in the show notes below. Perth, thanks again so much for joining me on the show today. 

[00:40:40] Perth Tolle: Thanks so much for having me. 

[00:40:42] Robert Leonard: All right guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week. 

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