The Compound and Friends - The New Way To Invest In Emerging Markets (with Josh and Perth Tolle)

Episode Date: June 7, 2019

Josh here - my friend Perth Tolle has been hustling and grinding harder than almost anyone I know on The Street these past few years - first, with the launch of her proprietary Life + Liberty Indexes and now with the first ETF based on her ideas.  Perth believes, as I do, that countries with a strong rule of law and respect for both civil and human rights will make for better long term investments than countries that are lacking in these areas.  The long term performance of the US, UK and Australian stock markets prove this. Where there is fairness and happiness, there is money to be made. Where there is repression and corruption, there is money to be lost.  Perth's ETF is an index fund holding emerging markets stocks but it weights the portfolio based on her quantitative ranking of each EM country, rather than based on the companies' market capitalization, as most index funds are currently invested.  Before taking any investment action or trading any fund, everyone should read the prospectus and understand the potential risks. You can find the relevant disclosures and details here: https://etfsite.alphaarchitect.com/frdm/ 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Downtown Josh Brown. I am live from the compound with my friend, Perth Toll. Perth, say hello. Hello. Okay, so Perth is here to talk about the launch of her brand new ETF, something that's taken her years to get off the ground, and now it's here.

Everyone's very excited about it. We'll get into that and more. Stick around. All right, so first of all, congratulations. Thank you. I'm so proud of you. Thank you. And just before we even talk about ETFs,

let me just indemnify everyone in the room, everyone in the building. None of this is financial advice. Nobody is soliciting you. Nobody's telling you to buy or sell any securities. Is there anything else we're supposed to say? Yeah, no, no, this is not a recommendation. Okay, good. So, but let's, let's talk about freedom. Is that what you're calling it? I know the ticker is FRDM. It is FRDM. Okay. And now that we've said the ticker, now I can't post this on my Twitter, but that's okay.

All right. I'll post it on my Twitter. Okay. Look, how about we'll be about the ticker? I won't use the ticker, but basically what you've done is you've said, I believe that there's a better way to invest in global country stock markets. And that better way is to overweight the companies that actually promote freedom for their citizens. Yes.

And to underweight bad actors, countries that are repressive or have a lot of corruption or have human rights abuses. So that seems like common sense that the countries that treat their citizens well will have better stock markets. Why isn't that obvious to everyone? So you actually wrote about this in your post called, what was it? Rule of Law and Stock Markets. So if you look up Josh Brown, Rule of Law and Stock Markets, you'll see that post. It's a great post and it basically lays out the entire premise. So the premise is that freer markets do perform more sustainably. They use their economic and human capital more efficiently and they recover from drawdowns more quickly than the unfree markets. But we created this to be more of a differentiated exposure in emerging markets.

So most emerging markets indexes are 30% to 35% China. So that's if you look at MSCI, FTSE, S&P, they're all like 32% to 33% China. Because why? Their market cap weighted? Their market cap weighted, exactly. So you end up with a lot in a very concentrated position in a very unfree market with a lot of geopolitical risk. There's about 70% in Asia in those indices. So this is a very different exposure because it has no China, no Russia, no Egypt, no Saudi Arabia. And we're not picking on those countries. We're using

objective third party quantitative metrics. So let's talk about that. Let's back up a little bit. So to start with, you created the Life and Liberty Indexes. Yeah. So Life and Liberty Indexes is my company. And the index that this fund is based on is the Freedom 100 Emerging Markets Index. So we can legally say the Life and Liberty Indexes without mentioning a product. We can talk about the index. All right, fine. Can you imagine? I know. All right, fine. Can you imagine? I know. All right, fine. So the Life and Liberty Index is though,

so you've got a data provider that helped you quantify which countries are more free. Is that the right way to say it? Yes, exactly. And which are more repressive. And then from there, you said, okay, if we wanted to wait based on this factor, these are the countries that an emerging market index should have more of.

So what are those countries? So in the index currently, the highest weightings are in Taiwan, South Korea, Chile, and Poland. Poland used to be number one holding back in 2017, but then it dropped to number four in 2018. Didn't they just elect some psycho hard right guy there? Yeah, so because of a lot of the problems with the independence of the judiciary and the basically stepping over of democratic norms in that country, it has dropped from number one to number four. But it's still one of the freer countries.

So no country is completely 100% free. So these are just freer than their peers. So you just have to be relatively freer than the other emerging markets. Right. It's not like we're talking about every country being like Sweden. It's never going to be that way or not in our lifetime. This is a relative game. And it's emerging markets.

And it's emerging markets. So their experience with democracy is a younger experience. Exactly. So it's not a judgment of the people that live there. It's just like where are they and in which state of development are they in? Correct. And their institutions and their governance, mostly their governments are more in control of human freedoms and economic freedoms. That's why we do the freedom screens on the country level and not on the security level.

Okay. So, Perth, since I met you three years ago, five years ago? I don't know. I think it was two or three years ago. Okay. It all bleeds together for me. But since I met you, you have been so passionate about building this thing, starting with the index and then saying, I want to make it so that people can invest based on this premise.

Like you've really killed yourself to get this done. And now it's here. But obviously now you have to attract capital to it. So it's like in some respects your work has only just begun. Correct. But you're working with my friend Wes Gray. That's right. And the team at Alpha Architect.

Shout out to Wes. What did Alpha Architects. Shout out to Wes. What did Alpha Architects provide you with in order for you to be able to launch this platform or this fund? So first, they were my biggest mentors for about a year. Wes helped me to... And Jack and these guys have done this. Yes. So they already have five ETFs. So they've been here and they helped me to on this yes so they they already have five etfs so they've been here and they helped me to start the process of building the infrastructure to launch this thing on my own right and then towards the end of the process when i was getting ready to basically launch it as life and liberty

investments they you know wes was like you know what it would be cheaper for you and you know if you just launched it with us we have the economies of scale. So they're the issuer. They're providing the back-end operations infrastructure and running the actual fund. So they're doing the trading. They're doing all the back-end operations to run the fund. So they're like iShares in that regard? And you're somebody that brought – so you come with the intellectual capital? With the index.

The idea, the index. But then they push the fund out so that it can be invested in. This is the most ridiculous way that Wes puts it, but basically they're the PIMCO to my research affiliates, which is ridiculous to say, but yeah. So you're the Rob Arnott of this project and they're the PIMCO.

All right, listen, whatever it is, because like you're not gonna- That's a ridiculous example. Yeah, but you're not gonna build an ETF issuer from scratch for one unproven fund. That would be even more ridiculous. And now you get to be aligned with Wes who is an absolute unbelievable businessman, all-around person. That's the right guy to have in your corner. They're the real freedom fighters.

They were actually in Iraq fighting for freedom, like people shooting at them and stuff. So they're the literal freedom fighters. So perfect, they were actually in Iraq fighting for freedom like people shooting at them and stuff. So they're the literal freedom fighters. Right. So perfect partners for this. Okay. And now you have a lot of people

in the industry that like have your back. Like you have a lot of people that both formally and informally. So Batnick and I are informally

like your advisors. Thank you. We haven't signed any pieces of paper. We just love what you're doing. And you're unpaid. Well, but I don't, but we don't want to be paid. Like we just, we believe're doing. And you're unpaid. Well, but I don't,

but we don't want to be paid. Like we just, we believe in the concept and we want to see you succeed. Thank you. I appreciate that. No, you guys have been my biggest like promoters and just mentors

and I so appreciate that. Okay. So now you've got this thing on the market and we can't mention the ticker and we're going to bleep out the other. You can mention the ticker.

I just can't retweet you. Yeah, but that's silly. I want you to be able to, I want you to be able to... I want you to be able to talk about your thing. Okay, so let's just stick to the index then. Okay.

Yeah. So you've got this thing out there. Yeah. Now, you have to like talk to financial advisors because that's who allocates funds. Yes. And it's impossible

to reach a million individual investors who each are going to put $1,000 in. Like, you'll never go... So you have to get big allocators to be on board. have to be more strategic in how i market and how i do my basically presentations and and getting the word out in a scalable way so especially as a smaller indexer we have to really focus on the scalable things. That's why we do a little more media. We have guys like you to kind of be out there helping us promote.

We have a lot of, like you said, champions in the industry. And I really appreciate that. Just people have resonated with this idea in a way that I am constantly floored by. And that never goes away. You shouldn't be because your intentions are great. And people recognize how authentic you are. And you shouldn't be floored. Thank you.

People should. All right. The last thing I want to ask you, the trade tensions with China, the fact that there are now threats that China might screw with Apple or China might crack down on – or the US might crack down on Chinese companies listing on the New York Stock Exchange. or the U.S. might crack down on Chinese companies listing on the New York Stock Exchange. Does that tension help your story or your fund's story? Or is it only really semi-related? So it is part of the story. So China's always a big part of our story

just because it has such a huge allocation in the other indexes and has none in ours currently. I hope they make it into the index one day. I love China, and it's my home country, and I hope they make it into the index one day. I love China and it's my home country and I hope they make it into the index one day. But they just have some improvements to make. The rhetoric is there. They have all the right trade rhetoric, like free trade, globalization. Our methodology does treat trade as international trade is good. Anything that impedes international trade is bad. So if we were to impose tariffs on China, that is actually bad for the U.S. If they retaliate, that is bad for China. So so, yeah, all of that. Quantitatively bad. Quantitatively. In your

scoring model. In our scoring model. It'll be bad for both parties. And this is not our scoring model. Again, it's the Fraser Institute, the Cato Institute, and the Friedrich Naumann Foundation that we use. So with permission. And those guys are, you'll meet them tomorrow at our appreciation event. So yeah, so it would score them lower if the trade, if there's more tariffs or non-tariff trade barriers, anything like that would score them lower on the economic freedom side. But China also has the human freedom side

that's more problematic as far as their scoring. So so, yeah, the trade war stuff does bring attention to, hey, there's some risk here. And yeah, that does help us. Any any kind of China news brings us into China is not the only country, though, that is going to have a lower weighting in your index. Right. Because of things like human rights. Like Saudi Arabia, I think, is smaller than yours? Saudi Arabia, we don't have any allocation to. So Saudi Arabia is being added to MSCI currently.

But not yours. But not ours. Okay, so that's a big differentiator. And Saudi Arabia is trying to do both things at once. They're trying to keep the monarchy, but then also float a giant listing for the oil company in Western countries. Are they going to be able to thread that needle? I don't know.

You see a lot of these emerging markets like Saudi Arabia and China trying to do two things at once. On the one hand, they're trying to open up as far as reforms. On the other hand, they have still some repressive practices politically. So they're both kind of doing both things at once. We'll see which side wins out internally in those countries. And I hope, you know, for the best and I hope they, you know, both make it into the index. Okay. The last thing I want to know, is there a cap on how big any country can get in the index? There's not currently because, I mean, if you look at the MSCI,

the FTSE and S&P, there's 33 to 35% in to 35% in China. So we don't have anything that big. Our biggest holding is 21% in Taiwan. So yeah, that's big enough, I think, as it is. Could Taiwan go to 40%? I mean, with this algorithm, we don't have a cap. But with this algorithm, it's very difficult for one country to get to that level. If it did, then I think we would impose a cap. We don't have to currently. But also that country could cross over and become officially like a developed market. Right. It could be, you know, become, yeah, it could be promoted into a totally different index.

Right. Okay. Well, listen, I want to wish you all the best of luck. I've been watching you hustle to get this done all these years and it it's finally here, and I couldn't be more excited for you. Thank you. I hope the reception for the product is huge. I hope people say, you know, I want emerging markets, but I don't feel good about investing in some of these terrible places where they don't treat people right, and this is like an alternative, and I hope there's a big audience for that. That's the idea.

Thank you so much for your part in this. All the best of luck. How do you want people to follow you? Where can they? So the index website is lifeandlibertyindexes.com and I'm on Twitter at Perth underscore toll and I'm on LinkedIn. And before investing in any ETF,

read the prospectus, know what you're doing, consult a financial advisor if you are unequipped to make decisions about what to buy and sell. And thanks again for being on. Thank you. All right.