XSLT transform to tree XML structure via attribute

A better explanation would have been useful. Staring at the example, I don't see what role the class attribute plays here; it seems that children are linked to their parent by comparing the substring of distName before the last / with the entire distNamestring of the parent.

There's also no apparent way to determine who the "progenitors" are, other than by looking for orphans using the above rule.

Note also that your input is not well-formed XML: you must have a single root element.

Now, if you can use XSLT 2.0, try:

XSLT 2.0

<xsl:stylesheet version="2.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
xmlns:my="http://www.example.com/my"
exclude-result-prefixes="my">
<xsl:output method="xml" version="1.0" encoding="utf-8" indent="yes"/>
<xsl:strip-space elements="*"/>

<xsl:function name="my:substring-before-last">
    <xsl:param name="string"/> 
    <xsl:param name="delimiter"/> 
    <xsl:value-of select="tokenize($string, $delimiter)[position()!=last()]" separator="{$delimiter}"/>
</xsl:function>

<xsl:key name="child" match="managedObject" use="my:substring-before-last(@distName, '/')" />
<xsl:key name="parent" match="managedObject" use="@distName" />

<!-- identity transform -->
<xsl:template match="@*|node()">
    <xsl:copy>
        <xsl:apply-templates select="@*|node()"/>
    </xsl:copy>
</xsl:template>

<xsl:template match="/input">
    <output>
        <!-- select progenitors -->
        <xsl:apply-templates select="managedObject[not(key('parent', my:substring-before-last(@distName, '/')))]" />
    </output>
</xsl:template>

<xsl:template match="managedObject">
    <xsl:copy>
        <xsl:apply-templates select="@*|node()"/>
        <!-- select children -->
        <xsl:apply-templates select="key('child', @distName)"/> 
    </xsl:copy>
</xsl:template>

</xsl:stylesheet>

Applied to the following well-formed input:

XML

<input>
    <managedObject class="MGW" version="U5.0EP2" distName="PLMN-PLMN/MGW-219454" id="192614000001726941">
      <list name="mgwOptions">
        <p>M3UA Interface (No 50035)</p>
      </list>
      <p name="name">MGW_A</p>
    </managedObject>
    <managedObject class="ATM" version="U5.0EP2" distName="PLMN-PLMN/MGW-219454/ATM-1" id="192614000003145148">
      <p name="lastSuccessfulUploadTimeStamp">21/07/15 01:32:40</p>
    </managedObject>
    <managedObject class="IFPG" version="A10TOP" distName="PLMN-PLMN/MGW-219454/ATM-1/IFPG-0" id="192614000003415034">
      <p name="prSectionSdhExchangeTerminalIndex">1</p>
      <p name="protectionSwitchingMode">REV</p>
      <p name="protocolVariant">MSP</p>
      <p name="switchingDirection">WO</p>
      <p name="waitToRestoreTime">300</p>
      <p name="woSectionSdhExchangeTerminalIndex">0</p>
    </managedObject>
    <managedObject class="IFPG" version="A10TOP" distName="PLMN-PLMN/MGW-219454/ATM-1/IFPG-1" id="192614000003415035">
      <p name="prSectionSdhExchangeTerminalIndex">3</p>
      <p name="protectionSwitchingMode">REV</p>
      <p name="protocolVariant">MSP</p>
      <p name="switchingDirection">WO</p>
      <p name="waitToRestoreTime">300</p>
      <p name="woSectionSdhExchangeTerminalIndex">2</p>
    </managedObject>
</input>

the result is:

<?xml version="1.0" encoding="utf-8"?>
<output>
   <managedObject class="MGW" version="U5.0EP2" distName="PLMN-PLMN/MGW-219454"
                  id="192614000001726941">
      <list name="mgwOptions">
         <p>M3UA Interface (No 50035)</p>
      </list>
      <p name="name">MGW_A</p>
      <managedObject class="ATM" version="U5.0EP2" distName="PLMN-PLMN/MGW-219454/ATM-1"
                     id="192614000003145148">
         <p name="lastSuccessfulUploadTimeStamp">21/07/15 01:32:40</p>
         <managedObject class="IFPG" version="A10TOP" distName="PLMN-PLMN/MGW-219454/ATM-1/IFPG-0"
                        id="192614000003415034">
            <p name="prSectionSdhExchangeTerminalIndex">1</p>
            <p name="protectionSwitchingMode">REV</p>
            <p name="protocolVariant">MSP</p>
            <p name="switchingDirection">WO</p>
            <p name="waitToRestoreTime">300</p>
            <p name="woSectionSdhExchangeTerminalIndex">0</p>
         </managedObject>
         <managedObject class="IFPG" version="A10TOP" distName="PLMN-PLMN/MGW-219454/ATM-1/IFPG-1"
                        id="192614000003415035">
            <p name="prSectionSdhExchangeTerminalIndex">3</p>
            <p name="protectionSwitchingMode">REV</p>
            <p name="protocolVariant">MSP</p>
            <p name="switchingDirection">WO</p>
            <p name="waitToRestoreTime">300</p>
            <p name="woSectionSdhExchangeTerminalIndex">2</p>
         </managedObject>
      </managedObject>
   </managedObject>
</output>