Freedom Drives Investment Returns and Mitigates Autocratic Risk

The Freedom Index reveals a profound truth often obscured by market-cap weighting: geopolitical and civil liberties are not just ethical considerations, but potent drivers of investment returns. By prioritizing countries with robust civil, political, and economic freedoms, this strategy uncovers hidden growth opportunities and sidesteps significant risks associated with autocracies. Investors seeking a differentiated approach to emerging markets will find an advantage in understanding how freedom acts as a powerful, albeit unconventional, predictor of long-term financial success, offering a compelling alternative to traditional investment paradigms.

The Freedom Premium: Unpacking Downstream Returns

The conventional wisdom in emerging market investing often defaults to market capitalization, a metric that inadvertently funnels capital towards autocratic regimes. Perth Toll, founder of Life and Liberty Indexes and creator of the Freedom 100 Emerging Market ETF (FRDM), presents a compelling counter-argument: freedom itself is a powerful, quantifiable driver of investment performance. Her thesis, that the freest countries generate the best returns, is not merely an ethical stance but a strategic advantage rooted in systems thinking. By analyzing countries through the lenses of civil, political, and economic freedoms, Toll maps a causal chain where foundational liberties create environments conducive to sustainable growth and risk mitigation.

The core of Toll's strategy lies in understanding that these freedoms are not isolated variables but interconnected components of a functioning system. Civil liberties, such as the rights to life, liberty, and property, form the bedrock. Without security from violence, crime, or arbitrary detainment, the very possibility of conducting business is compromised. This isn't just about personal safety; it directly impacts the operational viability of any enterprise.

"I mean, if you can't walk down the street without being concerned about being shot, then you can't really be doing business. So, and that's the idea there. So if you want to use a kind of a more colloquial way of looking at it, it's the rights to life, the rights to liberty, and the rights to property. So if you don't have life, we don't have anything else. So that is the basis of all the other freedoms actually."

This foundational layer of security then enables political freedoms, which are critical for transparency and accountability. Toll highlights the indispensable role of freedom of the press and expression. Without these, the independent verification of data--the very lifeblood of investment analysis--becomes impossible. Autocratic regimes, by their nature, suppress such scrutiny, leading to opaque financial reporting and an inability for investors to accurately assess risk or performance. The sanctity of contracts, underpinned by an independent judiciary and the rule of law, is another crucial political freedom. When contracts are not reliably enforced, the fundamental basis of business relationships erodes, creating a high-risk environment that conventional market-cap strategies often overlook. The disappearance of figures like Jack Ma serves as a stark, real-world example of how political instability and a lack of due process can abruptly derail investments and business ventures.

"So without third-party verification of data, which is what investors use to measure the impact of their investments, there's no way to actually measure the true impact of your investments or whether your analysis of the investments is even correct."

Finally, economic freedoms--property rights, sound monetary policy, free trade, and minimal government interference--provide the fertile ground for capital to flourish. While these might seem more directly related to investment returns, Toll argues they are intrinsically linked to civil and political liberties. The freedom to conduct business, to use one's resources as one sees fit, and to engage in free trade are not merely economic concepts but extensions of personal liberty. When governments dictate occupations or restrict the ability to earn a living, the fundamental freedom of individuals is curtailed, which in turn stifles innovation and economic dynamism.

The consequence mapping here is clear: countries that suppress civil liberties breed instability and unpredictability. Weak political freedoms lead to a lack of transparency and unreliable legal frameworks, increasing operational and investment risk. The absence of economic freedoms stifles enterprise and limits growth potential. Conversely, countries that champion all three pillars of freedom create environments where businesses can thrive, contracts are honored, data is reliable, and capital is more likely to be deployed productively. This creates a compounding effect, where initial investments in freedom yield disproportionately larger and more stable returns over time, establishing a durable competitive advantage for those who recognize and capitalize on it.

This approach directly challenges the conventional wisdom that prioritizes sheer market size. By eschewing market-cap weighting, the Freedom Index avoids countries with high concentrations of autocratic power, which often exhibit suppressed freedoms and, consequently, greater systemic risk. The demonstrable outperformance of the Freedom 100 EM Index, particularly in 2025 where it nearly doubled the MSCI Emerging Market Index and significantly outpaced the S&P 500, underscores the "freedom premium." This premium is not a fleeting trend but a consequence of investing in systems that are inherently more stable, predictable, and conducive to long-term wealth creation. The delayed payoff of investing in freedom--the years it takes for robust institutions and stable societies to foster sustained economic growth--is precisely what creates a moat, as most investors are unwilling to wait for these less obvious, but ultimately more powerful, downstream effects to materialize.

Key Action Items

• Adopt a Freedom-Weighted Lens: Begin evaluating emerging market investment opportunities not just by market size, but by the degree of civil, political, and economic freedom present in those countries. This requires a shift in analytical framework, moving beyond traditional metrics.
• Prioritize Independent Data Sources: When analyzing emerging markets, actively seek out data from independent, third-party sources that are not beholden to government influence. This is crucial for accurate risk assessment and performance evaluation.
• Focus on Rule of Law and Contract Enforcement: Over the next quarter, dedicate analytical resources to understanding the strength and independence of the judiciary in target emerging markets. This is a critical, often overlooked, indicator of investment stability.
• Invest in Long-Term Stability: Recognize that building a portfolio based on freedom principles may involve shorter-term "discomfort" by avoiding certain large, but unstable, markets. This strategic patience, paying off over 12-18 months and beyond, creates a significant competitive advantage.
• Diversify Beyond Market Cap: Actively seek out investment vehicles, like ETFs that employ freedom-weighting, to gain exposure to emerging markets that align with this philosophy, rather than solely relying on market-cap-weighted funds.
• Educate on the "Freedom Premium": For institutional investors or portfolio managers, spend time understanding and articulating the concept of the "freedom premium" to stakeholders. This requires bridging the gap between ethical considerations and tangible financial returns.
• Monitor Civil Liberties as a Risk Indicator: Integrate the monitoring of civil liberties (e.g., freedom of speech, assembly, and protection from arbitrary detainment) into your ongoing risk management process for emerging market investments, as these can be leading indicators of future instability.