The Property Investor Group

Commodities and residential property returns beat those of all other asset classes last year, according to Clerical Medical.

The Clerical Medical Assetwatch, a biannual study tracking the value of five asset classes over ten-years, shows commodities achieved a 20.6% return as China and India drove demand.

Meanwhile, residential property returns rose 10.7%, beating UK stock market returns up 5.3%, for the first time since 2004. The asset class has provided the best returns over the past decade, averaging 17.8% a year since 1997.

Cash outperformed bonds in 2007 for the second consecutive year, rising 6% compared to bonds’ 3.3% increase as capital values fell after interest rates hikes in the first half of the year. Bonds also underperformed shares for the fifth successive year, rising 3.3% compared to shares on 5.3%.

All asset classes, except cash and commodities, achieved returns below their long-term average during 2007. Domestic equities rose 5.3% and international shares grew 5.2%, their lowest returns in five years, while commercial property delivered its weakest returns in 15 years with a 5.5% drop.

Martin Ellis, HBOS chief economist, says: "Recent market performance highlights the benefits of portfolio diversification. In 2007 commodities was the best performing asset class. "Precious metals, a category of commodities, have performed very strongly over the last year. Gold is viewed as a store of value and a hedge against financial market uncertainty and inflation, which has helped to boost its price to record levels.

“Given the recent financial market turmoil, UK and international shares provided subdued returns in 2007, while UK residential property continued to be one of the best performers."