Freedom-Weighted Emerging Markets Selection
Weight investable countries by freedom and exclude the worst offenders
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 99%
The method replaces market-cap country weights with freedom-based weights. Begin with an emerging-markets universe, then remove countries whose markets are too small or illiquid to invest at scale. Score the remaining countries using independent measures of personal and economic freedom, covering civil rights, political freedoms, property rights, regulation, monetary policy, and trade. Include only countries scoring above the eligible peer-group average, give higher-scoring countries larger allocations, and exclude the worst offenders. Within each selected country, hold the ten largest and most liquid companies, weighted by market capitalization inside that country's freedom-determined allocation. Exclude state-owned enterprises to preserve the economic-freedom theme. The output is a top-down portfolio designed to isolate country-level freedom rather than letting economic size dictate exposure.
Origin
Perth Tolle developed the approach after seeing how policy shaped society and markets in China, Hong Kong, and the United States. She later heard advisory clients object to funding autocracies through conventional emerging-markets allocations.
Core principles
- 01Country governance affects societies and markets
- 02Market-cap weighting can concentrate capital in large autocracies
- 03Country freedom should determine country allocation
- 04Market size and liquidity remain necessary investability screens
- 05State-owned enterprises weaken the private-market freedom exposure
How to run it
- 1
Set the eligible universe
Start with emerging-market countries, then screen out markets that are too small or illiquid. This keeps the later freedom comparison limited to investable peers.
Pro tip Assess size and liquidity before applying the freedom score.
Watch out A highly free country may still be unsuitable if its market cannot support the intended investment scale.
- 2
Measure country freedom
Use an independent quantitative data set covering personal and economic freedom. Combine the variables into one country score rather than relying on a political label alone.
Pro tip Use data from a third party that does not take government funding.
Watch out Do not substitute subjective impressions for a consistent cross-country measure.
- 3
Apply the peer threshold
Compare each country with the average score of the eligible universe. Include only countries that score above that peer average, allowing borderline countries to move in or out as scores change.
Watch out The threshold is relative to the eligible peer group, not an abstract universal score.
- 4
Weight by freedom
Convert the qualifying country scores into portfolio weights. Give higher-freedom countries larger allocations and automatically exclude the lowest-scoring offenders.
Pro tip Keep country weighting separate from security weighting.
Watch out Underweighting an excluded autocracy would still direct capital toward it.
- 5
Build each country sleeve
Select the ten largest and most liquid eligible companies in each included country. Market-cap weight them within the country allocation and remove state-owned enterprises.
Pro tip Use security-level rules sparingly so the portfolio continues to isolate the country freedom factor.
Watch out Market-cap weighting at the company level should not override the freedom-derived country weights.
In the wild
Tolle describes India as scoring near the average of the eligible peer group. Because inclusion requires an above-average freedom score, India can enter or leave the portfolio as its position relative to countries such as Taiwan, Chile, Poland, South Korea, China, Saudi Arabia, Egypt, and Turkey changes.
→ A borderline country is included only when its measured freedom clears the peer threshold.
Tolle says Russia had never been included in the FRDM index. When Russia invaded Ukraine and Russian stocks were marked down toward zero, the index therefore avoided the loss that hit conventional emerging-markets benchmarks carrying Russia among their largest country holdings.
→ The governance rule removed a country risk that market prices had not anticipated.
Common mistakes
Letting market size set country exposure
Market-cap weighting can give the largest autocracies the largest portfolio weights regardless of governance risk.
Ignoring investability
Freedom scores alone do not make a market large or liquid enough for an investable index.
Keeping state-owned enterprises
Including state-owned companies weakens the method's attempt to carry economic freedom through to security selection.
Is it for you?
Best for
It is best for investors who want liquid emerging-markets exposure while treating country governance as an investment factor.
Not ideal for
It is not ideal for investors seeking complete market-cap replication or exposure to every emerging economy.
From the transcript
“So on the country level it is one hundred percent freedom weighted before we embark on freedom waiting, though, we do have a screen for…”
“you have to be above average among those eighteen peer countries in your score to be included.”
“within each country, we take the ten largest most liquid constituents and those are market capitalization weighted within their freedom weighted country weights.”
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