In 2003, the year after Houston money manager Perth Tolle graduated from Trinity University in San Antonio with a degree in finance, she spent a year in Hong Kong living with her father, reconnecting with her Chinese roots. On a visit to Shanghai, Tolle befriended a woman named Maggie. Both were 23 years old, but her new friend’s dark backstory shocked Tolle. While Tolle had enjoyed a suburban upbringing in Plano, Texas, Maggie lived in the shadows.
To the Chinese government, Maggie didn’t exist. «That policy changed the culture of my generation, and the effects of the demographic disaster in China are irreversible,» says Tolle, 42, who was born in Beijing but came to the U. «I had this realization that freedom made a difference in my life and in the markets». China is a core holding of most emerging-markets funds, making up 30% of the MSCI Emerging Markets Index, but if you were to peer into the portfolio of Tolle’s Freedom 100 Emerging Markets ETF, you wouldn’t find a single Chinese stock. It has no investments in Vladimir Putin’s Russia either.
As a result, year to date MSCI’s emerging-markets index is down 17%, but Tolle’s Freedom fund is off only 7.5%. Think of the Freedom ETF as a close relative of popular ESG funds, but instead of worrying about the environment or corporate governance, Tolle avoids investing in regimes that infringe on personal and economic freedoms. Those risks crystallized last year, when China imposed a series of arbitrary fines against its largest tech companies, including a $2.8 billion penalty on Alibaba. China’s woes dragged the MSCI Emerging Markets Index to a 2.5% loss in 2021, while Tolle’s fund gained 6.9%.
Currently 21% of its portfolio is in Chilean companies such as Sociedad Química y Minera de Chile, one of the world’s largest producers of lithium and iodine, which is essential for X-rays. « They recover faster from drawdowns and they use their capital and labor more efficiently,» Tolle says. In 2014 she quit Fidelity to raise her daughter but continued attending industry conferences as she mulled the idea of a freedom fund. « He loved it,» Tolle recalls.
After three days of fishing and drinking wine at the camp, Arnott committed to backing Tolle and later became an investor in her firm, Life & Liberty Indexes. Tolle created her index and shopped it to BlackRock and State Street, which turned her down. Freedom 100 Emerging Markets ETF has a 0.49% expense fee, most of which goes to Tolle. Working from her Houston home, Tolle rebalances her index yearly using the Human Freedom Index score calculated for 165 countries by the Cato Institute and Fraser Institute.
The index rates economic and personal freedom on a scale of 0 to 10, using 82 variables covering everything from jailed journalists to international trade policy. The freest emerging nations with liquid markets in 2021 were Taiwan , Chile and South Korea at 31 . Tolle’s ETF cares little about traditional ESG matters like carbon footprint, owning stock in Brazil’s iron giant Vale and Chilean forestry and energy conglomerate Empresas Copec. Although the fund is down in 2022, its assets are double where it ended 2021 thanks to record inflows following Russia’s invasion of Ukraine.
«What Russia did opened investors’ eyes to the risk in China,» Tolle says. «Market-cap weighting just doesn’t work as well with emerging markets because it creates a dictatorship-funding monster. » .
Source: HANK TUCKER | FORBES.COM
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