Just finished the 2011 exam and looking at the performance evaluation question. Question 9C.
They give a chart with interest rate effects, interest rate management effect and other management effects. For interest rate management effects the return is -.08
Statement given “Our strategy is to add value by actively managing the DURATION of the fixed income securities in the portfolio”
Does the statement of manager consistent with the data?
I choose Cannot be determined because interest rate management effect is made of duration, convecity and yield curve shape changes. My thinking is that the duration may have added value and the yield curve shape change subtracted value and therefor it can NOT be determined.
Answer is the statement is NOT consistent because the return is negative.
Interest management effect is active portfolio management through duration management. Thus, Manager 1 missed the point and is not consistent with his strategy.
Interest rate management affect is active portfolio management thru duration, convexity and yield curve shape change. Why wouldn’t be “Can not be determined”. Yield curve shape change could be negative and duration change could be positive.
Just looked on Page 166 of this text and for Matthews the numbers are representative of my point. Duration and Yieild curve shape cancel each other out but one of them added significant value while the other detracted from it.
Why “cannot be determined” would be correct answer when is clearly visible that manager underperformed in duration management which is inconsistent with his strategy?
My point is he clearly did not underperform and it can not be determined… He could have had a negative 0.20 performance with regards to twists in the yield curve and a positive 0.12% change in duration totalling -0.08.
We dont know the individual totals within the interest rate management effect.
For test purposes imagine all that was given is and not the above: Interest rate management effect = 0.0
Hypothetical statement I made up" Our strategy is to add value by actively managing the Yield curve shape of the fixed income portfolio"
My answer would be --> We cannot determine if this statement is consistent with the data by just looking at interest rate management and not knowing the breakdown of yield curve shape and duration.
That’s where my confusion lies with the 2011 exam.
I didn’t like this question. It didn’t ask if his strategy was successful, it asked if it was his strategy. It could be his strategy and he just got it wrong for that period.
Maybe your reasoning may be good but not for this question.I found CFAI official question plain without additional traps like at some 3rd party providers. You have been asked only to determine if Fixed Income manager broke his mandate by available performance measurement data. There are more similar questions and all of those are straightforward, imo.