A summary of asset returns in the first quarter of 2007 shows that real estate, which has been a hot performer for the past two years, continued to deliver, while alternative assets in general beat most traditional bond or equity categories.

Pimco compiled 1Q07 index returns to compare a broad range of asset classes.

The DJ Wilshire Reit Index, a proxy for real-estate investments, returned 36.1% in 2006, making it last year's best-performing asset class. The first quarter has seen it return another 3.6%.

Commodities, after a dismal 2006 (just 2.1%), have rebounded strongly in Q1, with a 4.6% return on the DJAIG Commodities Index. And hedge funds also are performing well, with the CSFB/Tremong Hedge Fund Index up 3.3% this year. Multi-strategy hedge funds are up 5.6% and event-driven funds are up 5.0%, making them the two best performers of any asset class index compiled by Pimco. The only strategy losing money this year so far is managed futures, down -4.7%.

Data for private equity and venture capital were reported with a three-month lag, but both performed well in 2006, returning 27% and 17% respectively.

Alternatives outperformed bonds in the first quarter. In fixed income, US Treasury Inflation-Protected Securities returned 2.5%, and the Merrill Lynch High Yield Index returned 2.7%. High yield was the best performer for fixed income last year, clocking an 11.6% gain for 2006. But overall fixed income is delivering mediocre returns, with the Lehman Aggregate up only 1.5% year to date. Bonds, however, are outperforming cash: the Citigroup three-month T-bill index rose only 1.2% in the first quarter.

Equities have been mixed. Some categories are among the strongest performers so far this year, namely US mid-cap value stocks and German equities. But US large cap stocks were beaten by bonds, and emerging-market and Japanese equities were mediocre or poor performers.

The top-performing asset class in Q1, beyond niche hedge-fund categories, was the Russell Mid-Cap Value Index, which has returned 4.9% to date. The German DAX has returned 4.9%. The hottest equity class last year, emerging markets (32.2% in 2006), have had an indifferent 2007, returning a mere 1.8%. Other strong areas from 2006, including large-cap value and small-cap value, have also had a rough start this year.

But the two worst-performing asset classes, aside from managed futures, are US large-cap equities (up 0.6% in Q1) and Japanese equities (up 0.4%). US large caps had a decent year in 2006 (returning 15.8%), but Japan disappointed last year. It appears that the lack of domestic consumption continues to bedevil the outlook for stock markets in the Land of the Rising Sun.