The Economic Freedom Fund

The Economic Freedom Fund (IEFP): Another Breakthrough In Free-Market Investing

by Dr. Mark Skousen, Chairman, Investment U
Wednesday, January 31, 2007: Issue #633

Twenty years ago, John Templeton, the guru of international investing, once told me something I’ve never forgotten: “When deciding which countries to invest in, avoid those plagued by socialist policies and inflation, and invest in nations favoring free enterprise and limited government.”

Since the early 1990s, free-market think tanks like Heritage Foundation and the Fraser Institute have published an annual Economic Freedom Index, showing graphic evidence that countries with free economies grow faster than unfree or repressed regimes.

Free nations such as the United States, Switzerland and Hong Kong have a much higher standard of living and higher growth rates than less free countries such as Egypt, Argentina and those of the former Soviet Union. Moreover, countries that change directions and free up their economies by cutting taxes and bureaucracy grow faster (Ireland is a good recent example), while nations that impose new regulations and taxes grow slower or even collapse (Venezuela).

But I’ve always wondered, do stock markets in free countries consistently outperform stock markets in less-than-free countries? The Economic Freedom Fund gives us the answer.

Announcing the First “Economic Freedom” Fund

Thanks to some exciting new research done by Stefan Spath and John Kirkscey, co-founders of Liberty Investment Group, we now have an “investable” index of economic freedom and a corresponding allocation methodology for investment purposes. They licensed First Trust, a major Chicago-based trust company, to create the first product based on this concept.

And just this month, First Trust announced the creation of the Index of Economic Freedom Portfolio.

The portfolio (IEFP) is made up of country funds or large foreign stocks from the top 20 countries labeled “free” by the annual Heritage/Wall Street Journal Index of Economic Freedom. (Countries are ranked by five categories: free, mostly free, moderately free, mostly unfree, and repressed.)

In 2007, countries in the “free” and “mostly free” categories include:

Australia
Belgium
Canada
Chile
Denmark
Finland
Germany
Hong Kong
Ireland
Japan
Luxembourg
The Netherlands
New Zealand
Singapore
Switzerland
the United Kingdom and
the United States

The Index of Economic Freedom Portfolio (IEFP) is updated each year, according to the Heritage/WSJ annual index. In 1995, the IEFP consisted of only 6 countries. Now there are 17 countries in the portfolio. Clearly, economic freedom has been expanding around the globe.

Spath and Kirkscey back-tested the performance of their index and came to a startling conclusion: Over the past 11 years, the Economic Freedom Portfolio has far outperformed world stocks in general. While the MSCI World Stock Index rose 140% during this time, and the Emerging Markets Index climbed 85%, the IEFP rose an astonishing 254%. See the graph below.

Economic Freedom Fund vs. Global Benchmarks

The chart above also indicates that during the late 1990s, the IEFP underperformed the world indexes. Why? Because the Index of Economic Freedom Portfolio at that time was heavily weighted by the Hong Kong stock market, which suffered a sharp selloff during the Asian Currency Crisis of 1997-98. However, since 2002, the IEFP has become broader based and has been on a torrid pace.

There is no assurance that the freedom fund will outperform the world stock market index each year. But in the long run, IEFP should be a great performer. Freedom pays dividends!

How To Profit from the Index of Economic Freedom Portfolio Investment Trust

First Trust is offering a unit investment trust called the Index of Economic Freedom Portfolio, 2007 Series, which invests equally in 17 country funds or stocks.

The minimum investment is $1,000, and the load fee varies from 3.95% to 2.45%, depending on the size of your investment. For more information, visit the website.

Good investing,

Mark