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

Host: Barry Ritholtz (Bloomberg)
Guest: Perth Toll (Founder, Life and Liberty Indexes and FRDM ETF)
Date: January 14, 2026

Episode Overview

In this episode, Barry Ritholtz explores how investors can improve emerging market results by deliberately avoiding investments in dictatorships and authoritarian regimes. Joined by Perth Toll, creator of the Freedom 100 Emerging Markets Index (ETF: FRDM), the conversation delves into the rationale, methodology, and real-world impact of screening for political, civil, and economic freedom when constructing global portfolios. The discussion highlights the pitfalls of market-cap weighted emerging market funds, the superior performance of freedom-weighted approaches, and timely case studies—from China's underperformance to Russia's market collapse.

Key Discussion Points and Insights

1. The Problem with Traditional Emerging Market Investing

• Market Cap Weighting Advantages Autocracies:
  • Autocratic nations like China, Russia, and Saudi Arabia end up dominating most emerging market indices due to the size of their markets, sometimes making up 30%+ of portfolios.
    • "[China] was 41% of the MSCI Emerging Markets Index. And now it is still, you know, upwards of close to 30%." (Perth, 02:26)
  • Investors often inadvertently funnel capital into regimes with poor governance and high long-term risks.

2. The Birth of the Freedom Index

• Personal & Professional Motivation:
  • Perth’s experiences living in both China and the US, and a pivotal period working in Hong Kong, revealed how government policies can determine societal and economic outcomes.
    • "One policy that really struck me was the one child policy... That policy has caused the biggest demographic crisis in the world today." (Perth, 03:45)
  • As a financial advisor, Perth noticed clients wanted to avoid investing in countries like Russia for ethical and risk reasons even before formal sanctions.
    • "A Russian client said I don't want to invest in Russia because it's like funding terrorism. And that was in 2014. So you can see how prescient that was." (Perth, 03:45)

3. Defining and Measuring “Freedom” for Investment

• Data-Driven Third-Party Assessments:
  • The index uses the Human Freedom Index, created by the Cato and Fraser Institutes, incorporating 87 variables spanning civil, political, and economic liberties.
    • "They look at 87 different variables for freedom... things like terrorism, trafficking, torture... freedom of speech... economic freedoms like taxation, private property rights..." (Perth, 05:37)
  • Countries scoring high on these variables are given greater weights in the index, while chronic abusers are excluded entirely.

4. Index Construction and Country Selection

• Eligibility and Weighting:
  • Starts with a universe of 24 emerging markets, narrowing to about 18 based on size and liquidity filters.
    • "Markets that are too small or too illiquid are not part of the eligible universe... So about 18 countries are left once you have that eligibility process down..." (Perth, 07:41)
  • Only countries above the peer group average on freedom are included; borderline cases (like India) come and go depending on the data.
    • "India is a borderline country. The score for India is just about average among all the 18 country peers." (Perth, 08:51)
• Company Selection:
  • Top 10 largest, most liquid companies from each included country.
  • Market cap weighting is used within each country's freedom-determined allocation.
  • State-owned enterprises are excluded to maintain the economic freedom thesis.

5. Case Study: China’s Underperformance

• Over three decades, China’s equity markets have barely appreciated, especially compared to the S&P 500 (+2700%).
  • "Since 1995, China's markets essentially down a couple of digits... total return for the S&P 500 over the same period is plus 2700%." (Barry, 10:10)
• The problem? Companies must favor state interests above profits or shareholder value:
  • "These are companies that have to put state interests first... Investors are subsidizing the cost of putting the state's interests first." (Perth, 10:58)
  • "WeChat has to give all the data over to the government that they want because... the government's interests come first." (Perth, 11:17)

6. Authoritarian Risks: Russia

• The failure of most indices to exclude Russia was highlighted by the 2022 invasion of Ukraine, which wiped out the value of Russian stocks overnight.
  • "Russia has never been an included country in the FRDM index... when their market went to zero, no one saw that coming. It was actually in the top 10 country holdings in the MSCI... investors got hit, you know, quite hard..." (Perth, 14:27)

7. Principle of Total Exclusion vs. Underweighting Autocracies

• Moral and Practical Arguments:
  • Partial exposure still means funneling capital to regimes with high risk and negative externalities.
    • "Even a little bit in an autocracy is really not what we want. We don't believe that's the best place to invest." (Perth, 15:32)
• Opportunities in Overlooked Free Markets:
  • Countries like Chile or Poland often have tiny weights in traditional indices but offer good liquidity and governance.
    • "Countries like Chile, countries like Poland that get less than 1% weight in the cap weighted indices... investors can participate in the tremendous growth that has gone on in those countries." (Perth, 15:32)

Notable Quotes & Memorable Moments

• On Market Cap Weighting’s Flaw (02:26):
  • "Some of these large autocracies get a very large weight in the emerging markets indices. And so that's really the problem that we're trying to solve by Freedom Weighting..." — Perth Toll
• On State-Run Chinese Companies (10:58):
  • "The main problem with investing in Chinese companies is that these are companies that have to put state interests first... Investors are subsidizing the cost of putting the state's interests first." — Perth Toll
• On the Russia Shock (14:27):
  • "Russia has never been an included country in the FRDM index... when their market went to zero, no one saw that coming." — Perth Toll
• On Investing for Positive Change (12:39):
  • "In emerging markets investing, there is no neutral. You're either directing assets for good or in some cases for evil... if we can, we want to be in the places that are promoting freedom in the world." — Perth Toll

Timestamps for Key Segments

• 01:00–02:26: Introduction — Why many broad EM indices overweight autocracies
• 03:45–05:15: Perth’s personal journey and why she created the Freedom Index
• 05:37–07:24: How “freedom” is quantitatively measured and implemented
• 07:41–08:51: Country selection process, why some are excluded/included
• 10:10–11:45: China as a case study in poor returns and governance risk
• 13:46–15:32: Russia and the costs of ignoring autocratic risk
• 16:41–End: Conclusion — choosing international exposure aligned with freedom and better risk/return tradeoffs

Conclusion

Barry Ritholtz and Perth Toll make a compelling case for investors to reconsider traditional emerging market exposure in favor of freedom-screened alternatives. By allocating capital away from dictatorships and toward societies with stronger civil, political, and economic rights, investors can potentially avoid catastrophic losses (as with Russia and China) and support positive change in global markets. The FRDM ETF and similar strategies demonstrate that financial performance and values-based investing can align, with notable outperformance in recent years.

Summary prepared for listeners seeking to understand the key concepts, methodology, and practical implications without listening to the full episode.