SWITZERLAND - Swiss pension funds saw domestic real estate outperform all other asset classes in the first half of 2011, with the 3.5% gains by far outperforming an average loss of 0.2% across total investments.

Explaining the negative results in the six months to June, the country's pension fund association ASIP blamed the strengthening Swiss franc as well as stock market volatility resulting in losses of 5.4% to foreign equity portfolios.

However, the organisation noted that indirect Swiss real estate outperformed all other asset classes, returning 3.5%.

Directly held properties also returned above average, offering gains of 2.3%.

The success of domestic real estate can be explained through the strengthening franc and its impact on holdings in foreign currencies.

ASIP warned: "The strong Swiss franc has meant Pensionkassen must pay further attention to the issue of currency management."

Daniel Thomann of Aon Hewitt Switzerland had previously warned that, despite a lower exposure to foreign equity, the country's pension funds would suffer from the higher currency risk as a result of the strengthening Swiss franc.

While returns were down over 2010, the drop was not only seen in real estate, but across the entire portfolio.

Last year saw average returns of 3.7% compared with year to date losses of 0.2% - with real estate retaining its position as the leading asset class, having returned more than 6% between in the 12 months to December 2010.

Exposure to property also increased in the first half of the year, up by 1.6% percentage points to 13.1%, reaching the highest point since the end of 2008.

Following a steep increase from 8.9% at the end of 2007 to 14.8% at the end of 2008, real estate exposure had stabilised, hovering between 10.8% and 11.5%.