QUESTION ONE Investec Advisers Company (IAC) is a registered investment counseling firm solely involved in managing international securities portfolios. After much research on the developing economy and capital markets of the country of South Africa, IAC has decided to include an investment of South African stock market in its Emerging Market Commingled Fund. However, IAC 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. South Africa'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 South Africa because of high commissions and government stamp taxes" on securites 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 South Africa and foreign ownership of South Africa 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 IAC's political consultant believes that isolation sentiment may prevent much real progress in the short term run. a) Briefly discuss four aspects of the South Africa's environment that favour investing actively and four aspects that favour indexing, 14 marks b) Recommend whether IAC should invest in South Africa actively or by indexing and justify your recommendation based on the factors identified in part a) 6 marks