Global Advisers Company (GAC) is an SEC-registered investment counseling firm involved solely in managing international securities portfolios. After much research on the developing economy and capital markets of the country of Otunia, GAC has decided to include an investment in the Otunia stock market in its Emerging Market Commingled Fund. However, GAC has not yet decided whether to invest actively or by indexing. Your opinion on the active versus indexing decision has been solicited. A summary of the research findings follows.
Otunia's economy is fairly well diversified across agricultural and natural resources, manufacturing (both consumer and durable goods), and a growing finance sector. Transaction costs in securities markets are relatively large in Otunia because of high commissions and government "stamp taxes" on securities trades. Accounting standards and disclosure regulations are quite detailed, resulting in wide public availability of reliable information about companies' financial performance.
Capital flows into and out of Otunia and foreign ownership of Otunia securities are strictly regulated by an agency of the national government. The settlement procedures under these ownership rules often cause long delays in settling trades made by nonresidents. Senior finance officials in the government are working to deregulate capital flows and foreign ownership, but GAC's political consultant believes that isolationist sentiment may prevent much real progress in the short run.
a. Briefly discuss four aspects of the Otunia environment that favor investing actively and four aspects that favor indexing.
b. Recommend whether GAC should invest in Otunia actively or by indexing, and justify your recommendation based on the factors identified in Part a.