To illustrate for the Investment Committee of the profit-sharing plan to which you are a consultant on some of the issues that arise in measuring performance, you have identified three U.S. fixed-income management firms whose investment approaches are representative of general practice. Each firm's approach follows.
Firm A: An enhanced index fund manager that seeks to add value by superior security selection while maintaining portfolio duration and sector weights equal to the overall bond-market.
Firm B: An active duration manager investing only in the government and corporate bond sectors. The firm uses futures to manage portfolio duration.
Firm C: An active manager seeking to add value by correctly anticipating changes in the shape of the yield curve, while maintaining portfolio duration and sector weights roughly equal to the overall bond market.
You have provided the Committee with the following additional information about these firms, derived from a consultant's database.

a. Evaluate the performance of each of these three firms relative to its appropriate index and to the manager universe. Use only the data from the descriptions and the preceding table, even though other information would be required for a more complete and accurate appraisal.
To provide additional guidance to the Committee, you decide to do an attribution analysis on the returns produced by Firm A and Firm C and have prepared the following table:

b. Evaluate the performance of Firm A and of Firm C based on all the information previously provided and your interpretation of the data in this new table.
c. Based solely on the attribution analysis you performed in Part b, state which firm produced the better result and justify yourconclusion.

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ANNUALIZED TOTAL RETURN DATA (PAST FIVE YEARS) Firm B Firm C 9.0% Firm A Reported Returns 9.2% 9.3% INDEX SECTORS Aggregate Government/ Index Governments Corporates Corporate Mortgages 8.7% Index Return 9.0% 9.8% 95% 8.3% CONSULTANT'S MANAGER UNIVERS E Managers Using the Aggregate Index as Their Benchmark Managers Using the Govt./Corp Sector as Their Benchmark 8.4% 8.9 9.4 9.9 13.9 All Managers Return 5th percentile 25th percentile 50th percentile 75th percentile 95th percentile 6.0% 7.1 8.0 8.6 9.3 8.1 8.6 9.1 13.1 PERFORMANCE ATTRIBUTION ANALYSIS (PAST FIVE YEARS-ANNUALIZED TOTALRETURNS) RETURN ATTRIBUTED TO Yield Curve Sector Weighting Security Selection Decisions Total Duration Retum# Decisions + Decisions + Decisions + & Residuals Firm A Total return Benchmark 9.20% 8.00% 0.80% 0.00% 0.40% index return Difference 8.70 0.50 7.00 1.00 0.50 0.30 0.70 -0.70 0.50 -0.10 Firm C Total return Benchmark 9.00% 7.03% 0.80% 0.71% 0.46% index return Difference 8.70 0.30 7.00 0.03 0.50 0.30 0.70 0.01 0.50 -0.04