25.07.2006

For the 12-month period ending April 30, 2006, the World InvestmentOpportunity Funds European Equity Fund gained 42.19%, as measured in EUR.

The financial year just ended will make history as an extraordinary positiveperiod for equities. Propelled by strong growth in the USA and in China, theglobal economy performed very well and expanded more than 4% in 2005. Growth inEurope, however, lagged for most of the time. Germany, Europe’s the largesteconomy, managed to grow a mere 1%. An army of almost five million unemployedpeople negatively impacted consumer confidence. Only the countries onEurope’s periphery such as Scandinavia and Spain as well as the new EC memberstates from Central Europe performed well. Finally, by the end of 2005, the coreEuropean economies started to gather steam.

After a moderate performance of 7% during the financial year 2005, measuredby the Stoxx Composite index, European equity markets accelerated their uptrend.They shot up 31% in the 12-month period ended on April 30, 2006. In a globalcontext, the performance of European equities was only topped by the Japanesemarket, which rose more than 40%. Within Europe, Germany (+44%) and Switzerland(+37%) were clear outperformers, while the British stock market, the largest onein Europe, lagged (+25%).

Strongly rising corporate earnings were the main driver of the Europeanequity markets. On the one hand, corporations benefited from strong globalgrowth. On the other hand, they continued to focus on cost savings. Businesseswere rationalised and restructured, working hours were extended and some jobswere transferred into lower wage countries in Eastern Europe. These measurementswere bearing fruit in form of surging earnings: In all 2005, companies includedin the large European indexes, increased their profits by a stunning 25%.Monetary policy remained expansive and supported equity prices. The EuropeanCentral Bank (ECB) only started to hike leading interest rates in December of2005 by 25 basis points (=0.25%) to 2.25%. Neither the rise in long-terminterest rates by some 50 basis points to 3.97%, nor the substantial increasein oil prices impacted the upbeat sentiment of the equity markets.

After the extraordinary strong equity performance in the preceding 12-monthperiod, a slowdown of the strong dynamics is likely. But the investmentenvironment should stay constructive. Given the absence of extraordinary events,the global economy will expand close to 5% in 2006. A slight deceleration inUS growth should be offset by an economic rebound in Europe and awell-performing Japan. Due to the significant improvement of some importantindicators from the corporate and the consumer sector towards the end of 2005,there is hope that the export-induced jump-start of the European economy isgoing to turn into a broad-based recovery.

The corporate sector will remain the most important driver for the Europeanequity markets. The torrid profit growth of 2005 is going to slow downsomewhat, but we still expect earnings to grow in the area of 8% to 12%. We areat the opinion that the dynamics of the earnings power is generallyunderestimated. Corporate Europe will continue to take advantage from thebenefits of the globalisation. The Euro, which has been very strong in recentyears, has forced companies to produce more efficiently. Other supportingfactors for equities are their still attractive valuation, the ongoingM&A mania as well as the fact that, due to low interest rates, there arestill no investment alternatives to shares. Bold tightening moves of the USFederal Reserve, sharply increasing long-term interest rates, a significantdecline of the US Dollar, a softening US real estate market and increasingpolitical imponderables are some of the key risks to watch out for. Furthermore,after such a three-year long and nearly uninterrupted rise of the equity marketsa more or less prolonged correction cannot be ruled out.

Paul Carr

Head of Product Relationship Management

Central and Eastern Europe