Real estate and commodities have been the most volatile asset classes in the past three years, with performance see-sawing investors from one extreme to another. Emerging-market equities, on the other hand, have delivered consistent out-performance since 2005.

Looking at annualised and monthly returns across 23 asset classes based on benchmark indices, bond house Pimco has assembled a picture of the continued economic strength and investorsÆ confidence in emerging markets, as well as the strong performance among safer financial assets against inflationary pressures.

Real estate, represented by the Dow Jones Wilshire Reit Index, lost -17.9% in 2007, following a gain of 36.1% in 2006 and a more middle-of-the-road annualised return of 14.0% in 2005. Commodities played the reverse role, with the Dow Jones AIG Commodities Index gaining 16.2% in 2007 after a miserable year in 2006, when it eked out 2.1%, which in turn followed a spectacular 2005 with returns of 21.4%.

Private equity, represented by the Cambridge Associates US Private Equity Index, suffered a bad year after strong performances in 2005 and 2006. While a year ago it had returned 26.7% to investors, by the end of 2007 it returned a mere 5.8%.

Hedge funds fared reasonably well, however, with the CSFB/Tremont Hedge Fund Index rising 10.4% in 2007, which puts it in the second quartile of asset classes. While not quite as attractive as the 13.9% gain this index produced in 2006, the asset class was able to hold its own in the face of the subprime crisis, beating 2005Æs pedestrian return of 7.6%.

Emerging markets, in contrast, may have saved many a portfolio managerÆs career. The MSCI Emerging Markets Index returned a stunning 37.8% in 2007, on top of gains of 32.2% in 2006 and 34.5% in 2005.

Other asset classes that did well in 2007 include German equities, US large-cap growth stocks and US Treasury inflation-protected securities (Tips). Actual money-losers were, after real estate, Japanese equities and US value stocks, including small caps and large caps.

In the fixed-income world, Tips were the best performer in 2007, with the Lehman US Tips Index gaining 11.6%, its best performance since 2004. This reflects investorsÆ fears about inflation and a flight to quality in the wake of the mid-2007 subprime mortgage and credit crises, says Pimco.

Other sections in the bond universe did reasonably well, except for high yield: the Merrill Lynch High Yield Index got hammered in the second half of the year and managed to squeeze out an annual return of 2.2%, less than cash (4.7%). High yield lost its role of previous years of providing alpha returns to bond portfolios.

In the world of equities, growth trumped value. The Russell 1000 Growth Index rose 11.8%, while its mid-cap equivalent gained 11.4%. Big also trumped small: the Russell 2000 Growth Index, which tracks small caps, managed only 7%. But it was value that really lost the plot, with the Russell 1000 Value Index declining -0.2%. Small plus value spelled disaster, with the Russell 2000 Value Index dropping -9.8%.

US equities as a whole delivered middling performance, with the S&P500 index covering large caps rising 5.5%, trailing the FTSE (7.3%), behind the MSCI Europe/Africa/Far East Index (11.2%) and left in the dust by the German DAX (22.3%), which stormed to a third consecutive year of stellar returns.

But anything, it seems, could beat Japanese equities: the Nikkei 225 lost -10.2% in 2007; bad, but worse when you recall it gained 41.5% in 2005. For what is supposed to be a developed financial market, that looks distinctly emerging market-like.