Worldwide Investment Advisors (WIA) is a SEC-registered investment advisory firm

Question

Worldwide Investment Advisors (WIA) is a SEC-registered investment advisory firm involved solely in managing international securities portfolios. After much research on the developing economy and capital markets of the country of Utopia, WIA has decided to include an investment in the Utopian stock market in its Emerging Market Commingled Fund. However, WIA has not yet decided whether to invest actively or by indexing. Your opinion of the active versus indexing decision is being solicited. A summary of the research findings follows.

Utopia’s economy is fairly well-diversified across agricultural and natural resources, manufacturing (both consumer and durable goods), and a growing financial sector. Transactions costs in securities markets are relatively large in Utopia due to 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 Utopia and foreign ownership of Utopian securities is strictly regulated by a national government agency. The settlement procedures under these ownership rules often cause long delays in settling trades made by nonresident investors. Senior finance officials in the government are working to deregulate capital flows and foreign ownership, but WIA’s political consultant believes that isolationist sentiment may prevent real progress in the short run.

1. Briefly discuss four aspects of the Utopian environment that favor investing actively and four aspects that favor indexing.

2. Recommend whether WIA should invest in Utopia actively or by indexing, and justify our recommendation based on the factors identified in part 1.

Explanation / Answer

1.

In favor of investing :

a) economy is fairly well-diversified across agricultural and natural resources, manufacturing (both consumer and durable goods)

b) growing financial sector

c) Accounting standards and disclosure regulations are quite detailed, resulting in wide public availability of reliable information about companies’ financial performance

d) Senior finance officials in the government are working to deregulate capital flows and foreign ownership

In favor of indexing :

a) Transactions costs in securities markets are relatively large in Utopia due to high commissions and government “stamp taxes” on securities trades.

b) Capital flows into and out of Utopia and foreign ownership of Utopian securities is strictly regulated by a national government agency.

c)The settlement procedures under these ownership rules often cause long delays in settling trades made by nonresident investors.

d)WIA’s political consultant believes that isolationist sentiment may prevent real progress in the short run.

2.   WIA should invest in Utopia by indexing as the market is not that stable and the WIA’s political consultant view taken into account .All that favors the indexing is having more impact than that favoring the active.

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