Freedom-Weighted Emerging Markets Strategy
Weight countries by civil, political, and economic freedom instead of size
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 97%
The strategy replaces market capitalization as the primary country-allocation signal with a composite measure of civil, political, and economic freedom. Independent third-party metrics score conditions such as personal safety, expression, judicial independence, property rights, monetary soundness, and freedom to trade. Those country scores determine portfolio weights, concentrating exposure in the freest eligible emerging markets and excluding autocracies that would otherwise receive large weights because of their size. The mechanism treats freedom as both a risk screen and a potential return factor: reliable data, enforceable contracts, personal security, and economic autonomy create a stronger environment for businesses and investors. Company exposure is then selected within the country allocations produced by the freedom-weighting process.
Origin
Perth Tolle described the strategy on Masters in Business as the method behind the Freedom 100 Emerging Market ETF, using data from the Cato Institute and Fraser Institute.
Core principles
- 01Freer countries offer stronger conditions for long-term growth
- 02Civil, political, and economic freedoms work together
- 03Market-cap weighting can concentrate portfolios in autocracies
- 04Independent third-party data reduces political influence
- 05Country conditions shape the reliability of company-level analysis
How to run it
- 1
Source independent freedom metrics
Use quantitative country data from third parties that are insulated from government influence. Keep the scoring provider separate from the portfolio allocator.
Pro tip Check how the data provider is funded and whether governments can pressure its methodology.
Watch out A politically influenced data source can make the entire screen unreliable.
- 2
Score all three freedom dimensions
Assess civil, political, and economic freedoms rather than relying on one dimension. Include personal safety, expression, judicial independence, property rights, monetary policy, regulation, and trade.
Pro tip Treat the dimensions as complementary parts of one operating environment.
Watch out Economic measures alone can miss risks from repression, unreliable information, or arbitrary detention.
- 3
Build a composite country score
Combine the underlying variables into one country-level score. Use that score consistently across the eligible emerging-market universe.
Pro tip Preserve the same rules across countries instead of making discretionary exceptions.
Watch out Selective overrides weaken the strategy's objectivity.
- 4
Weight by freedom instead of size
Give higher portfolio weights to countries with stronger composite freedom scores and exclude countries that fail the screen. This prevents large autocracies from dominating merely because their markets are large.
Pro tip Compare the resulting country concentration with a market-cap benchmark to see which political risks were removed.
Watch out Expect meaningful benchmark divergence because the method deliberately rejects market-cap country weights.
- 5
Allocate companies within country weights
Build company exposure inside the country allocations established by the freedom scores. Revisit those allocations as new country data changes the ranking.
Pro tip Keep company selection and country freedom scoring as distinct stages.
Watch out Strong company fundamentals do not remove country-level legal, political, or information risk.
In the wild
A conventional emerging-market index gives large weights to autocracies because their public markets are large. The freedom-weighted process instead applies the composite country scores, excludes the countries that fail the screen, and reallocates exposure toward freer eligible markets.
→ The portfolio expresses emerging-market exposure without automatically funneling its largest allocations to autocratic countries.
The Freedom 100 Emerging Market ETF applied the method in a live portfolio. Perth Tolle said most clients use it as a core emerging-markets strategy based on the belief that freer countries will outperform over the long run.
→ The method functions as a return-seeking country-allocation strategy as well as a values and risk screen.
Common mistakes
Using market cap as a neutral country signal
Market-cap weighting can create concentrated exposure to large autocracies without assessing their political and legal risks.
Scoring economic freedom alone
Civil and political freedoms affect safety, information quality, contracts, and the ability to conduct business, so they cannot be treated as optional extras.
Trusting government-dependent data
A scoring source exposed to government funding or coercion can compromise the independence of the country assessment.
Is it for you?
Best for
Investors seeking systematic emerging-market exposure that favors freer countries.
Not ideal for
Investors who want to track a conventional market-cap-weighted emerging-market benchmark closely.
From the transcript
“the Freedom Index is basically a freedom weighted emerging markets strategy that uses third party quantitative freedom metrics to weight countries instead of using market…”
“all of these things added together give us a composite country score from our data think tanks, the Cato Institute and the Fraser Institute, and…”
“We believe that freedom freer countries will outperform in the long run type of strategy.”
From the episode
At The Money: Investing in Freedom