Your friend Janet Adah, a foreign country resident, has hitherto invested in diversified portfolios of assets picked strictly from within her home securities market. Janet recently enrolled in a Finance class and has gathered from her lectures that combining her domestic portfolio with some foreign securities could be beneficial. She is therefore considering investing a part of her wealth in securities listed in South Africa. She has asked for your opinion on South Africa's investment environment. Not wanting to advise Janet on the basis of your "gut feeling", you decide to do an internet search in order to obtain objective information. On the internet, you come across the following summary of South Africa's 2017 investment environment from a recent OECD report (https://www.oecd.org/economy/south-africa-economic-forecast-summary.htm):

Economic growth is projected to rebound in 2017 and to strengthen further in 2018, driven by household consumption and investment. In particular, the improvement in electricity production removes bottlenecks and should boost confidence and therefore investment, provided that political uncertainties dissipate. Rising production costs, together with the earlier rand appreciation should weigh on exports. The macroeconomic situation is still difficult as growth is weak and inflation is above the central bank's target. Falling inflation will create scope to ease monetary policy; however, scope for easing may be limited in the short term as the persistent drought is driving up food prices. Lifting barriers to competition and favoring the development of SMEs could boost productivity, employment and living standards. Unless growth accelerates, however, unemployment and inequality will remain very high. Fiscal policy is under pressure from the risk of a ratings downgrade. Due to the continued increase of government debt and higher borrowing rates in the context of persistent low growth, South Africa has no fiscal space. The government needs to stick to its consolidation path and improve the effectiveness of spending and investments. You have suggested that Janet, being a foreign resident, could consider either of two alternative approaches of asset management: she could invest passively by picking an index (e.g., through exchange traded funds, commonly available in South Africa) or by securing your services as an asset manager to actively manage her South African portfolio. Janet would like your views on the two investment approaches based on the OECD summary above.

Required:

a. Discuss aspects of South Africa's investment environment that favor active investing and aspects that favor passive investing.

b. Recommend to Janet whether to invest in South Africa actively or by indexing. Justify your recommendation based on the factors identified in part (a) above.

c. Discuss three reasons for and three reasons against including portfolios of foreign securities in an investor's portfolio holdings that Janet could also consider before making the decision.

d. Discuss, in the generic sense, five major problems that may be encountered by an investor who wishes to have an internationally diversified portfolio.

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A a Discuss aspects of South Africas investment environment that favor active investing and aspects that favor passive investing Favoring Active Investing 1 Economic Rebound and Investment Opportuniti... View the full answer