Lugging his suitcase in one hand and a sales pitch in the other across North America, Yves Choueifaty, the Paris-based chief investment officer of TOBAM, wants institutions to understand that investing in autocracy does not work.
That is Choueifaty's hope as he meets with investors to get commitments to LBRTY, the France-based asset management firm's new strategy that limits the risk of exposure to countries with autocratic risks.
But he still faces the hurdle of convincing institutions that this is a sound way of investing.
"There is nothing that makes less sense than investing in a country in which reigns arbitrary and economic irrationality," Choueifaty said. "It simply doesn't make sense to invest in such an environment, and I think it's really based on common sense. It's not rocket science."
Choueifaty, who founded TOBAM in 2005, said 60% of the firm's clients are public pension funds. The firm manages $7 billion in assets.
He presents LBRTY as a clear-cut solution at a time when institutions are re-evaluating where they're putting their money, especially in countries that limit civil liberties and political freedoms. While it has been liquidating its Russian ETF, BlackRock saw the performance of its China ETF fall nearly 10% since the start of 2023 amid a congressional probe into Chinese companies.
The methodology for LBRTY comes from third-party research centers such as the V-Dem project, which monitors and publishes data on political developments and civil liberties in countries back to 1789.
Using this data, TOBAM ranks every country on a scale between zero and 10, with Choueifaty describing one as being "next to North Korea" and 10 being "very close to paradise." TOBAM considers countries above six to be democracies, while those below — including China, Russia, Saudi Arabia and Turkey — are tyrannies.
From there, the firm reviews every stock listed in the world and assesses how exposed they are to autocracy. While some strategies may exclude select autocratic countries, Choueifaty noted that investors do not have to own stocks domiciled in an autocratic government to be exposed to this risk.
LBRTY is available through three Luxembourg-domiciled UCITS, including a global fund, a global ex-U.S. fund and an emerging markets fund. The annual management fees range between 0.5% and 1.5% depending on the share class, and there are no withdrawal lockups. U.S. investors may purchase shares through U.S.-based fund managers.
He cited research by Yale University that said "there were more than 1,000 companies listed outside of Russia that had to close their business" in the country last year in response to the invasion of Ukraine. He then pointed at an article from India-based analysis platform TFIGlobal that highlights a study by the Moscow-based Center for Strategic Research, which reported that the withdrawal resulted in $240 billion in losses for those companies.
"You don't need to own Russian stocks in order to be exposed to Russia," Choueifaty said. "You don't need to buy Chinese stocks in order to be exposed to China. What matters the most is indirect exposure."
As for whether the strategy works, the performance speak for itself. In a presentation for investors shown to Pensions & Investments, TOBAM highlighted LBRTY's backtested annualized gross return of 6.1% excluding fees for the period between August 2008 and March 2023. Choueifaty contrasted the performance with the Bloomberg Emerging Market ETF, up 3.7%, and its Emerging Markets ex-China ETF, up 3.5%.
Choueifaty said "very large pension funds have expressed an interest in LBRTY" but would not disclose their names.
Although no institutions have committed to the strategy, LBRTY would not be alone.
Although Choueifaty has said the methodology for LBRTY is patented and unique to TOBAM, the firm is not the first to launch a strategy around the risk of autocracy.
For instance, the Freedom 100 Emerging Market ETF, or FRDM, weights companies domiciled in countries based on how they fare on political and economic freedoms.
FRDM is "just starting to get institutionalized trust after (the ETF) hit half a billion" in assets, said Perth Tolle, the founder of Life + Liberty Indexes. The firm, which launched the fund, has around $605 million in AUM.
Tolle, who previously worked as a retail adviser at Fidelity Investments, noted that FRDM's clients were retail investors when the ETF launched in 2019, which she said was needed "to get the fire going." But while she welcomes institutional licensing, interest has not turned into commitment for her either.
"We have a lot of institutions that reach out to us that want to hear how we do things, but my suspicion is they're hearing our methodology, and they're going back and doing it without us," she said.
Skeptics argue "it's somewhat difficult to link democracy vs. autocracy and economic growth," said Chris Konstantinos, the Richmond, Va.-based director of investments and chief investment strategist at the asset management firm RiverFront Investment Group, a global asset manager with $9 billion in AUM as of March 31.
Konstantinos, who has researched the potential effects of investing in countries on equity returns, noted studies into the connection are "somewhat inconclusive."
"If the linkages between democracies and economic growth are hard to establish, then it makes sense that establishing corporate earnings trends from democracies might be even more difficult," he said.
Committing to strategies that minimize autocracy risk may be related to the fact that these countries make up a large part of benchmarks, as Chinese equities do in the MSCI Emerging Markets index. Institutions "may feel it's too big of an opportunity cost risk to meaningfully underweight such areas," Konstantinos added.
But should an investor add equities exposed to autocracy to their portfolio, Choueifaty said they'll increase their risk and have less in returns, or what he calls "negative reward."
"Common sense is that the governance of a country has an impact on each economy," he said. "Nobody can deny that."
