Global Advisers Company (GAC) is a registered investment counseling firm solelyinvolved in
international securities portfolios. After much research on the
developing economy and capital markets of the country of South Korea, GAC has
decided to include an investment of South Korea 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.
South Korea’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 Korea
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 Korea and foreign ownership of South Korea
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 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 investing
actively and four aspects that favour indexing.
(ii) Recommend whether GAC should invest in South Korea actively or by indexing
and 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