Global Advisers Company (GAC) is a registered investment counseling firm solelyinvolved in managinginternational securities portfolios. After much research on thedeveloping economy and capital markets of the country of South Korea, GAC hasdecided to include an investment of South Korea stock market in its Emerging MarketCommingled Fund. However, GAC has not yet decided whether to invest actively orby indexing. Your opinion on the active versus indexing decision has been solicited.A summary of the research findings follows.South Korea’s economy is fairly well diversified across agricultural and naturalresources, manufacturing (both consumer and durable goods), and a growing financesector. Transaction costs in securities markets are relatively large in South Koreabecause of high commissions and government “stamp taxes” on securites trades.Accounting standards and disclosure regulations are quite detailed, resulting in widepublic availability of reliable information about companies’ financial performance.Capital flows into and out of South Korea and foreign ownership of South Koreasecurities are strictly regulated by an agency of the national government. Thesettlement procedures under these ownership rules often cause long delays in settlingtrades made by nonresidents. Senior finance officials in the government are workingto deregulate capital flows and foreign ownership, but GAC’s political consultantbelieves that isolation sentiment may prevent much real progress in the short term run.i) Briefly discuss four aspects of the South Korea’s environment that favour investingactively and four aspects that favour indexing.(ii) Recommend whether GAC should invest in South Korea actively or by indexingand justify your recommendation based on the factors identified in part i).2) “Because corporations do not actually raise any funds in secondary markets, they(secondary markets) are less important to the economy than primary markets.” Discuss
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