Discover more from The Global Capitalist
An interview with Perth Tolle: The Founder of Life and Liberty Indexes
Perth and I talk about some of the most pertinent events in emerging markets while touching upon the ripple effects of the coronavirus on geopolitical and commercial tensions.
Tom: Perth, welcome! Thank you again for your time today! Why don’t we start by giving the audience a little background on who you are and what got you to where you are today?
Perth: Sure thanks for having me! I grew up in both China and the U.S. and I am living in Houston, Texas now. After college I moved back and lived in Hong Kong for about a year. There I realized that freedom made a difference in my life and in the markets in these various countries, especially Hong Kong, China, and the U.S. That was the first time I realized the kind of impact freedom had on markets because these markets were very different at the time. My observations in China led me to explore what that impact was because I saw a lot of excitement about China “opening up” and Chinese business was the big thing - this was around 2003. I also saw something that shocked me as someone coming from the free world at that time: I realized that there was an issue with human freedoms and individual rights in China. I realized that they did not match the personal freedoms with their advances in economic freedoms and that at some point, this could be a market that could hit a plateau.
After returning from Hong Kong, I worked at Fidelity for about 10 years as an advisor. I had clients who felt the same way as I did, coming from other emerging markets like Russia or Saudia Arabia and other Middle Eastern countries who worked in Houston and in the L.A. area. I had a lot of non-native clients and they wanted to participate in emerging markets but did not want to invest in these more autocratic countries. Most of these were people who were very familiar with these countries. After I left Fidelity, I left to stay home with my kid until she got big enough to start going to school, then I launched this company.
Tom: Great! For those unfamiliar, the company’s name is Life and Liberty Indexes. Through your experiences, what got you to the point of creating this company and could you walk us through the “freedom weighting” angle of your business?
Perth: Right now in emerging market indexes and funds, especially ETFs, about 40% of the portfolio is invested in China, about 2% in Saudi Arabia, about 3% or so in Qatar and Russia. That means that these emerging markets funds have roughly 50% of their portfolio made up of very autocratic countries that have very repressive human rights practices. I wanted to create something for investors who wanted to participate in emerging markets but did not want to help indirectly fund these types of unfree regimes. They could have a way to express that in their emerging markets allocations. The Life and Liberty Freedom 100 Emerging Markets Index is our first index. Basically, it is designed as a way for investors who believe in the long-term benefits of freedom and for them to be able to express that belief in their portfolios. Instead of market capitalization weighting, which leads to high allocations of these very unfree regimes, we use freedom weighting instead. We don’t arbitrarily exclude any country, we just freedom weight them and some of them just don’t make the cut at the moment, but they could become more free in the future and get into the index, which we hope they will!
Based on freedom weighting, China, Russia, Saudi Arabia, Egypt, Turkey have no weight at all in the index, the higher freedom countries we see a higher weight, the lower freedom countries we see a lower weight. The worst offenders are excluded all together. Our biggest weights are in Taiwan, South Korea, Chile, and Poland.
Tom: You made a great point about the average retail investor and their allocations in emerging markets. I’d assume that most investors are blind to how much exposure they have to these unfree countries such as Russia and China. In following this strategy, how do you think moving forward with the events unfolding in not just China, but Russia, Saudi Arabia, and Qatar will affect the topic of freedom in emerging markets?
Perth: It does appear that, from global events, freedom appears to be declining overall — but that is only if you look at the very short-term. If you look at the long-term, the arc of history bends towards becoming more free. If you look at history, the freest markets have been the ones that have been the most successful, the most dynamic while the least free markets are more stagnant. Right now is a very important time for investors to take a stand with their dollars and say “We stand up for freedom in our investments and we don’t want to promote unfree regimes with our dollars.”
You can see this across the globe, like your protests letter today. As anti-freedom sentiment from governments come out, there is a rising rise of dissent as well as of resistance. That force is just as strong, if not stronger around the world. You can see there are protest movements in Hong Kong that inspire movements in other parts of the world including the US now. U.S. protestors are using many of the same tactics the Hong Kong protestors used. On top of that, the Hong Kong protests were also inspired by other protests throughout history. Just as oppression is contagious, so is freedom.
You can bet on one or the other, but I’d rather bet on freedom and lose than take the other side and win. But, I do not believe that freedom is on the losing end in the long-term. In emerging markets, it makes more sense to freedom weight rather than to market cap weight, because freedom is a foundation. We use personal and economic freedom metrics and these are quantitative metrics from the Cato Institute, the Fraser Institute, and the Friedrich Naumann Foundation. They rank seventy-six different variables ranging from the fundamental right to life, liberty, and property but also personal and economic freedoms like terrorism, torture, trafficking, rule of law, private property rights, taxation, business manipulations, freedom of press, freedom of media, freedom of religion, and so forth. All of these metrics add up to the country’s score and we use that score to derive our weights. These are the things that are the foundation of a society and economy. If you look at history, the freer markets of yesterday are becoming or has become a developed market of today and tomorrow. So, it makes more sense to weigh more to freedom than to market capitalization because it is freedom that is going to launch these markets into the next echelon.
Tom: Staying on the topic of freedom weighting vs. market cap weighting: In your opinion, do you think there is any sort of inflated valuation for some of these less free, but maybe more popular markets such as China and Saudi Arabia? For instance, we’ve heard a lot about the “swift” recovery of the Chinese markets, but how much merit should we give that narrative? Given China’s autocracy, isn’t it fair to assume they may be artificially inflating their economy for some ulterior motive?
Perth: China has been an out performer during COVID-19 which is very surprising because they were the worst hit and also where the crisis started. By the way, a lot of these things that have come out of China, be it COVID-19, Swine Flu, or Bird Flu -- In a freer market, there is more incentive to prevent these things before they get out of hand. But, there are reports from Reuters and Bloomberg about how China banned short selling and then banned institutional selling for a while following Chinese New Year which may have added to some of their outperformance.
Regardless of the source of the outperformance, there are always going to be some markets that are overvalued, some markets that are undervalued, some markets that are oversold. In this case, a lot of the other emerging markets surrounding them who handled the crisis much better such as South Korea and Taiwan were a little bit more oversold in the crisis. But that’s the nature of their market. They are very transparent, they let the bad news cycle through and in a recovery time these are the markets that you want to focus your investments on because not only were the worst hit in the market, but they also were the most transparent in their approach. Ultimately, they are going to be the beneficiaries of possibly some supply chains shifting going forward.
Tom: How do you think this COVID-19 environment is going to shake up the landscape of emerging markets? I’ve written a little about the monetary relief that has been deployed but in terms of geopolitical tensions or supply chains specifically, what do you think from here on out is going to be the outcome of COVID-19 in emerging markets?
Perth: There were some trends in place that were already there before COVID-19 started. People were already diversifying away from China as far as their supply chains go. A lot of these emerging markets including India, Indonesia, Vietnam, are offering all kinds of incentives for companies to diversify outside of China and into their markets. So, that was something that was just accelerated by COVID-19. COVID-19 made people realize that it is not good to just have all of your eggs in one basket, regardless of what the basket is. Any disaster, like a pandemic, can happen in any country and if you are not diversified you have a much harder time due to that event, whatever it may be. Just like how investors need to diversify and not have 40% of their emerging market allocation in one country, supply chains are doing that now as well. It’s mostly seen in some of the bigger companies. For example, Taiwan Semiconductor Manufacturing Co. is now diversifying their production out of China. FoxCon is diversifying out of China, they are going to places like India and the United States. Samsung did this a while back so they were a little bit ahead of the curve on diversifying their exposure, because they have had a rocky path with China recently. A lot of these supply chains shifts that were already in place before the pandemic have now been accelerated and have become much more urgent.
The other emerging markets are there to help pick up where China leaves off, offering all kinds of incentives for these people to move into their markets. For the other emerging markets, the freer they are and the more open they are to trade, the more they should benefit from this.
Tom: What countries do you think will benefit most from this decoupling from China?
Perth: China, being known for their production and manufacturing, so the other markets that could be beneficiaries are especially the ones close by and have open systems. The bigger ones are South Korea, Taiwan, Singapore and India. India is offering a lot of incentives, so they are kind of mid-size. Also Mexico, Vietnam, Indonesia, and Thailand.
Tom: What other trends can you identify in emerging markets that may be relevant to some American investors or maybe to just people in general in their daily lives? Is there anything that you have identified that you think has not gotten the press it deserves?
Perth: Growing up mostly in the United States, we are very sensitive to our home country or, rather we have a lot of home country bias. We are very sensitive to issues going on in our own country and I think that's natural. Picture this: A natural disaster happens in China, a huge earthquake kills a bunch of people. Meanwhile, you have an operation to have your pinky toe removed.
Obviously, the bigger disaster from an unbiased opinion is the one where hundreds and thousands of people are dying in another country. But, because of proximity to you, chances are you’re going to lose more sleep over your situation even though it is a less dire event. From a third party perspective you will focus on the worst one, but from your perspective you are going to focus more on your own, and that’s just natural. Everyone is prone to home country bias.
Right now you see all these protests going on in our own country, which is great, and we have a system where we have freedom of assembly, speech, and media. So far they have withdrawn some of the National Guard, so that’s good. We have all of these things in place so if there is an injustice, it can be corrected through these methods and it can be brought to people’s attention. We have people like LeBron James, who is very vocal and he is a great guy. He came out of nothing, has succeeded, and he has been very dedicated to giving back and wanting to make the world a better place. I absolutely respect that. But at the same time, when Daryl Morey (GM of the Rockets) came out in support of the Hong Kong protestors -- which, by the way there are so many similarities to the American protestors -- LeBron James came out and said that he needed to be more educated.
We project our optimism onto other countries because we have a culture where we are allowed to criticize ourselves and we are allowed to criticize our government. Countries like China are not allowed to do that. But, they get extra points, social credit, by criticizing us because the US is an enemy because we have interfered in their matters. That creates this sort of uneven playing field, we love to criticize ourselves and we will never get detained for that. Whereas in China, they love to criticize us but they can’t criticize themselves.
There was a funny dialogue between China and Thailand on the internet a couple of months ago where they had this internet troll fight. The Thai supported Taiwan because Taiwan said that Hong Kong is different from China like Taiwan is different from China. This Thai model said on her Twitter that the virus originated in China and that ignited this huge Twitter war and these Chinese Twitter trolls just went against Thailand and Thailand’s government.
Thailand, although they have lots of problems going on, have the freedom to attack their own government and they LOVE to attack their own government, just like the U.S.. So when the Chinese trolls started attacking their government, the people from Thailand supported it and completely agreed with them! By doing this they created the “Milk-Tea” alliance where countries that drink milk tea, like Thailand and Taiwan, became allies on the internet. This is a good illustration of what happens in the US. Basically we have a lot of home country bias and we project our optimism onto other countries and we think that they operate the way we do and adhering to the same standards but they don’t.
In fact you can see this with the whole de-listing situation. We are not delisting China, the media is making it out to be that we are doing this horrible thing to China but we are not. We are enforcing our standards that we have allowed them to not adhere to. So every listing here in the US, regardless of the country, adheres to these standards. China happens to have a rule that you are not allowed to share audits. So China, by law, prevents these countries from adhering to American listing standards. We have given them a pass in the past but now we are not giving them a pass. It's not a big deal, it’s fair. A lot of these things China is making to be a big deal are actually not. We can be myopic when it comes to emerging market investing, either we completely avoid it and have home country bias or trust the indexers to tell us what are these standards we ourselves should invest in. We ourselves should know what we are investing in. But if we are aware of these countries, maybe it is better we aren’t investing in emerging markets and throwing money at these autocratic regimes, if you are going to use a cap weighted product.
Tom: In terms of your experience with researching or living in some of these freer countries, do you have any examples of some industry or some product or companies that have spore from these countries because maybe they have more of a “lax” industry? What other discoveries have you made when researching for your company or exploring other emerging markets?
Perth: The issues with companies coming out of these emerging markets,one from an indirect experience is that one of my colleagues actually has family in China and he invested in a company called “WallStreetJournal.CN”. This was a company in China that directly translated the Wall Street Journal into Chinese and it was public. The stock went up and was a great performer. But then one day, the Wall Street Journal came out with an article that was critical of the Chinese government, WallStreetJournal.CN translated the article, the entire site was immediately shut down, and the company value disappeared. This was a stock that was doing extremely well and one day it is gone, your money is gone. This is the risk of investing in these unfree countries.
By the way every company in China has a CCP cell in their company, that is required. It is officially required now but it was once unofficially required for a very long time and they just called it “government relations”. When I was in Hong Kong I had interviewed with a company that was based in Shanghai, and it was a family friend who owned the company who was trying to recruit me over there because it was closer to family. When I went over there, I had the whole tour and spent time with different departments, and one of the departments was called government relations department. The one person who worked in the department previously was previously a reporter, an anchorwoman. The people who work in these types of departments are very diplomatic and are very well suited for this. It is just something you have to deal with when working in China.
American companies have come to realize some of this but a lot of us are still really blinded. When American companies go there or even an American educated Chinese individual goes back to China to start a company, you are treated like a rock star, you are a VIP everywhere you go. The government also makes sure this happens to attract foreign capital. This is another thing that happens in autocratic regimes, their economy and their market gives them legitimacy for their role. They have to make sure they get the foreign investment, because they need that for their legitimacy for their own purposes. It’s hard for us as foreigners to go over there and imagine that anything could be wrong because we can’t see it and it is designed that way, it is designed that we never see it. But I think if you wanted to know, you would know. A lot of these companies that operate in Xinjiang, for example, I don’t believe that they don’t know what is going on. But you can justify it, you can be blind to it, and the Chinese government will do everything to help you to justify what’s going on.
Another personal anecdote is that I had a when I was in China, in Shanghai, that we called “Maggie” but she had no name officially, she had no birth certificate, no school records, no hospital records, no social security benefits or what is called “Houku”. This is common with girls that are born into a family that already has a boy also due to the one child policy, which I am a product of. There are 30 million missing women in China. That is the official Chinese estimate, other estimates go up as high as 60 million. These are not women who are not accounted for, these are women that are gone. The women who are not accounted for are like my friend Maggie. They just have no record, no existence on paper, but they do exist and they are accounted for, they’re the lucky ones. We also account for a missing women metric in our index. This is something that has changed the entire makeup of future generations of the country and it has changed the entire culture of my generation. Now they are allowed to have 2 children but no one is having 2 children because it is not something society values anymore. It has changed everything. Before the cultural revolution, China was like “Yes! Everyone needs to have more children!” My mom’s family for example has 4 children. My generation everyone has one child. And then this next generation people are allowed to have 2 but they are mostly having one. So China has the worst demographics in the world, that is a huge problem that is something they will have to deal with. That is why they are investing so much in technology, not only for mass surveillance and control but also because they need robotics to boost the workforce. These are some types of issues in unfree countries that you don’t think of. Your company completely disappearing in one day and things like demographics that come from these types of very Draconian type of policy. It was like the world’s worst social experiment. Government overage has gone too far.
Tom: At what age did you leave Beijing?
Perth: I was 8.
Tom: From there did you move directly to the US? I remember you mentioned you spent some time in Hong Kong as well.
Perth: Yes that was after college in Hong Kong. I lived in Beijing until I came to the US at age 8. I came here just a few months before the Tiananmen Square incident. It was still a different time back then in China. A lot has changed since then. A lot of positives. They went from horrible economic policies under Mao to what they have now, which is not great but not terrible. That improvement has created this sort of illusion of an economic miracle. Until they match that progress of the economic freedom side on the personal freedom side, now they are going to have some issues. You can’t innovate if you are scared to post “Winnie the Pooh” on the internet. If you let your people be free you could solve a lot of problems. People in power like to be in power.
Tom: You bring up a funny point, I came across this meme a while back that I think you might enjoy. I’m not sure if you are familiar with the new doge memes, you have the buff doge vs. the one that is crying. It was one, “Chinese Leaders” and the buff doge was saying “I am the son of the moon. I control all” and on the right was “Wahh they call me Winnie the Pooh”. I’ll have to send it to you because I don’t do it enough justice!
To round this out, what are your thoughts in terms of post COVID-19, what are some countries you think might become more free and what are some countries that maybe might even exit the index because they might be employing some non-free policies moving forward?
Perth: Coronavirus does allow a lot greater surveillance of populations than it used to. It kind of exacerbates problems, so countries that are already unfree to begin with, will probably become more… unfree as far as privacy goes. But that could be used for good or evil and we are seeing right now in the United States that these things are not. Technology for example, it's just a tool. Just as it can be used for mass surveillance, it can also be used to shine a light on things that we are doing poorly. Such as the things being done during these demonstrations. There has been a lot of video that has shown us that there is a lot of room for improvement. All of this technology has allowed for citizens to be their own journalists. In a place in China, where media is not free, we see a lot of videos come out even during covid of citizens telling us what is going on. Of course, they have all disappeared now. But those videos came out and they wouldn’t have been able to before. Just as I think there are things that are going to become less free, there are also things that will become more free as a result. Also during COVID, people started speaking out because they were dying and they literally didn’t care. We are going to tell the truth because we are dying anyways.
This one woman just came out and said, “Hey, I support Taiwan. I support Hong Kong. I support all of you to fight the CCP because look at what they are doing to us. My parents are in the next room, waiting to die.” Literally she didn’t care anymore. When people don’t care about dying, people tell the truth. COVID had some of those effects as well. With anything that happens people tend to think, “Ugh it’s hopeless now we have no freedom because the government is going to surveil us because of contact tracing and all of that”. There are issues there but hopefully we will have some checks on technology companies and our citizenry is better informed and better equipped to fight these intrusions than some of these other countries. The freer countries, sometimes because of these events will become even freer. Maybe after these protests we will have some reforms and better in some respect. We have had these freedoms but maybe the black population in the US hasn’t. Maybe they will become more free. At the same time we should be prepared for the possible increase in intrusions as well. You could look at it as half full or half empty I guess.
Tom: In terms of using the index in a portfolio, what role would you think your index would play in a typical portfolio?
Perth: This strategy is designed to be a broad emerging markets strategy. It is a little more concentrated than the EEM’s, IEMG’s, VWO’s out there in regards to the number of securities. You have 100 securities so there are 10 countries, 10 securities per country. Within the country weights, once we have the freedom weighted country weights we market cap weight the top 10 largest, most liquid, non-state owned enterprises in those countries. That will give us a good representation of the country as a whole. These are very large and mega-caps stocks so they are very tradeable. Underlying liquidity is better than VWO so there is never going to be like a trading issue that we can really foresee at the moment. It is designed so it can completely replace your emerging markets portfolio.
That is how I use it and that is how most people I know are using it currently. Now another way to use it because some people are saying: “You don’t have any exposure to China?” because they don’t make the cut. So VWO, for example, has 40% exposure to China. We don’t want 40% but we may not want 0% so we might just use a combination of the two. I’ve seen a lot of people use it as a combination to these kind of very heavily concentrated to China and other unfree markets, but mostly China portfolios, and use this as a way to balance out their countries.
Tom: If people want to learn more about you and Freedom Indexes where should they go from here?
Tom: This has been great. Thank you so much for your time today, Perth. I’ll have to send you a hat!
Perth: It’s my pleasure! I look forward to seeing where you go with this newsletter from here.