Global Advisers Company (GAC) is a registered investment counselling 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 invest in the Otunia stock market through its Emerging Market Fund. However, GAC has not yet decided whether to invest actively or by indexing (passively). Your opinion on the active versus indexing decision has been solicited. A summary of the research findings follows.

Otunias 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 GACs political consultant believes that isolationist sentiment may prevent much real progress in the short run.

A. Briefly discuss four aspects of the Otunias environment that favour investing

actively and four aspects that favour indexing (passive investing).

B. Recommend whether GAC should invest in Otunia actively or by indexing, and

justify your recommendation based on the factors identified in part (A).