R36 Investment Manager Selection: Stephanie Tolmach case CFAI Question Bank

Stephanie Tolmach is a consultant hired to create a performance attribution report on three funds held by a defined benefit pension plan (the Plan). Fund 1 is a domestic equity strategy, Fund 2 is a global equity strategy, and Fund 3 is a domestic fixed-income strategy.

Tolmach uses three approaches to attribution analysis: the return-based, holdings-based, and transaction-based approaches. The Plan’s investment committee asks Tolmach to (1) apply the attribution method that uses only each fund’s total portfolio returns over the last 12 months to identify return-generating components of the investment process and (2) include the impact of specific active investment decisions and the attribution effects of allocation and security selection in the report.

Of the three attribution approaches referenced by Tolmach, the method requested by the committee:

A. is the least accurate.
B. uses the underlying holdings of the actual portfolio.
C. is the most difficult and time consuming to implement.

A is correct. The committee described a return-based attribution, which is the least accurate of the three approaches (the return-based, holdings-based, transaction-based approaches). Return-based attribution uses only the total portfolio returns over a period to identify the components of the investment process that have generated the returns.

I understand why statement (1) is returns-based. But what about statement (2)? The question did not say to base my reply on statement (1) only. Statement (2) seems to describe Transactions-based.