UK - Hewitt Associates is focusing on domestic real estate for its UK pension fund clients following two years of volatility and poor performance in geared overseas funds.

Nick Duff, senior consultant at Hewitt, told an audience at IPD's UK Benchmark Launch in London that the consultancy began investing client money in UK real estate in the fourth quarter of 2009 and would continue to focus on the market going forward.

"At Hewitt we are very positive on the UK. Initial yields - at around 7% - indicate that stock is fairly priced," he said.

"We are expecting quite strong returns over 2010 with maybe a bit of a pull back over 2011."

Duff stressed that UK real estate would continue to constitute UK pension funds' core real estate exposure, as clients had experienced difficulties in overseas real estate recent years as a result of the higher levels of leverage typically used in funds.

"It has been a very interesting two or three years for us. We've been very much involved in a number of recapitalisations of UK and overseas funds," he said.

"That has at times been very stressful, but we are turning the page now in terms of investing new client money."

Hewitt Associates conducted 45 fund manager selections in 2009 - more than double the equivalent figure for 2008 - including 10 segregated direct portfolio mandate searches in the last six months, ranging from £100m to £500m in size.

Duff said the majority of these were focused on the UK, whereas during 2006 and 2007 most of Hewitt's real estate selection activity was dedicated to overseas managers.

Duff stressed the importance of identifying a "good business management model" when assessing fund managers.

"We've had issues certainly in the bull market where businesses got too focused on expanding globally and effectively grew too fast," he said.

"That damaged their performance and damaged, more importantly, their relationships with their clients."

Duff also criticised the varying quality of "transparent attribution analysis" among managers - that is, the ability to explain to investors why investments behaved the way they did.

"When you are meeting a manager and you ask them a question, ‘why was that underperformance coming through in 2007', we expect an answer," he said. "It was quite disturbing sometimes to see the number of managers that can't."

Duff also warned fund managers against allowing too much change in personnel across their companies.

"The biggest issue I have with our client base is management change within the actual organisation. When you are continually rotating your teams that is something that will annoy clients, and they will often go against our advice in terms of replacing managers on that basis."

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