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INVESTOR CONFIDENCE INDEX SUMMA

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					STATE STREET GLOBAL MARKETS

INVESTOR
CONFIDENCE
INDEX
SUMMARY
STATE STREET GLOBAL MARKETS INVESTOR CONFIDENCE INDEX                                                                                                 MAY 2005




        INTRODUCTION
        Confidence in the economy and capital markets is a critical driver of economic and financial fluctuations,
        and of the business cycle. When confidence increases, consumers and investors want to buy consumer
        goods, durables, and invest at prevailing prices. When confidence decreases, spending and risk-taking tend
        to fall. The connection between confidence levels and future economic activity has made indicators such
        as The Conference Board’s survey of consumer confidence, one of the most highly anticipated regular
        monthly data announcements.




        THE PREMISE
        Although measures of consumer confidence receive widespread recognition, there is no generally accepted indicator of
        investor confidence. Investors are said to be confident when the news about the future is good and stock prices are
        relatively high. However, higher prices typically have more to do with good fundamentals, such as rising industrial
        production, rapid productivity growth, business fixed investment, and low real interest rates rather than the underlying
        sentiment or mood of investors. A good confidence measure should indicate whether, for a given set of fundamentals,
        investors are bullish or bearish on risky assets.

        Quantitatively measuring intangible shifts in investor sentiment presents a unique set of problems to researchers.
        Unfortunately, investor surveys are often outdated by the time they are released. On the institutional side, accuracy can
        be compromised as decision makers are often too busy to fill out surveys. In both cases, it is difficult to survey a
        sufficiently large number of investors to make the sample meaningful.



        THE APPROACH
        State Street’s approach measures confidence directly and quantitatively by assessing investor holdings of risky assets, using
        techniques based on modern portfolio theory. The idea is simple: the more of their portfolios that professional investors are
        willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence. When risk appetite
        increases, investors move to increase, in the same proportion, their holdings of each risky investment by buying in the
        marketplace. This process may occur when there is good news and prices are up, but could also happen over a period of
        bad news and falling prices. As a result, the risk appetite of institutional investors is related to, but not dependent upon,
        price behavior. Actual investor holdings and recent purchases can serve as a better indicator of investor confidence.1



        INFORMATION BASE
        The State Street Investor Confidence IndexSM implements a model that analyzes the actual and changing levels of risk
        contained in investment portfolios representing approximately 15% of the world’s tradable assets.This pooled
        information makes it possible to estimate institutional investors’ risk appetite in a timely and accurate manner. The
        model was developed by Harvard Professor Ken Froot and State Street Associates Director Paul O’Connell.


1
    The theory behind the measurement of risk appetite in this way is set out in Froot and O’Connell (2003), “The Risk Tolerance of International Investors,”
    working paper, available on request from State Street.



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STATE STREET GLOBAL MARKETS INVESTOR CONFIDENCE INDEX                                                                         MAY 2005




        STATE STREET INVESTOR CONFIDENCE INDEX RESULTS
        A comparison of the State Street Investor Confidence IndexSM and the MSCI US Equity Index2 reveals that investor
        confidence has not followed the extraordinary cycle that characterized stock prices in recent years. The Index today is
        somewhat lower than it was, on average, in the late 1990s, but not by much. At shorter horizons, however, changes in
        stock prices have been associated with shifts in investor confidence. The monthly correlation between the Index and
        US stock prices is 0.27.



        COMPARISON WITH MSCI INDEX
        In Figure 1 we can make the following observations:

        > The most dramatic fall in investor confidence in recent years occurred in August of 1998, when Russia defaulted
          on its debt, LTCM, a large global hedge fund, failed, and stock prices fell. At this time, the confidence indicator
          suggests it was confidence, not fundamentals that brought stock prices down. Investors simply did not want to hold
          as many risky assets during that period of turmoil.

        > Two other drops occurred during this period. The first coincided with the onset of the bear market in 2000.
          Confidence fell substantially for the last four months of 2000, when US stock prices fell 13 percent. Confidence
          improved in January and February of 2001, suggesting that the subsequent declines in stock prices were driven
          primarily by fundamentals.

        > In the Summer of 2002, confidence deteriorated on concerns over accounting standards, corporate governance, and
          the U.S. Securities and Exchange Commission’s handling of accounting reform. Again, the initial fall in confidence
          was accompanied by declines in prices, but confidence remained low for the rest of the year while prices stabilized.

        FIGURE 1 (TO MARCH, ‘05)


          125                                                                                       1500

          120                                                                                       1400
          115
                                                                                                    1300
          110
                                                                                                    1200
          105
                                                                                                    1100
          100
                                                                                                    1000
           95
                                                                                                    900
           90
                                                                                                           Investor
           85                                                                                       800
                                                                                                           Confidence Index
           80                                                                                       700
                                                                                                           MSCI US Equity
           75                                                                                       600
                03/99      03/00         03/01        03/02        03/03        03/04       03/05




2
    Source MSCI. The US MSCI Index referenced in this analysis is the Developed Market Standard USA Index.




                                                                               3
STATE STREET GLOBAL MARKETS INVESTOR CONFIDENCE INDEX                                                                  MAY 2005




        COMPARISON WITH CONSUMER CONFIDENCE
        Figure 2 plots the State Street Investor Confidence IndexSM against the Conference Board’s measure of consumer
        confidence3 over the same period. While the Conference Board’s survey and the Investor Confidence IndexSM show the
        same broad pattern of decline since July 2000, there are some important differences. For example, over the most recent
        period, the Investor Confidence IndexSM reached its bottom in December 2002, at a level of 87.2 and has risen steadily
        since. This indicates that investor sentiment remained strong prior to and during the 2003 War in Iraq, in anticipation
        of the ensuing risk environment and the recovery in asset prices. Consumer Confidence, by contrast, continued to ebb
        until March of 2003.

        FIGURE 2 (INCLUDES SSICI TO MARCH, ‘05)


          125                                                                        160

          120                                                                        144

          115                                                                        128

          110                                                                        112

          105                                                                        96

          100                                                                        80

           95                                                                        64
                                                                                           Investor
           90                                                                        48
                                                                                           Confidence Index
           85                                                                        32
                                                                                           Consumer
           80                                                                        16
                                                                                           Confidence
           75                                                                          0
                03/99      03/00         03/01   03/02   03/03     03/04     03/05




3
    Source: The Conference Board, Inc.




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STATE STREET GLOBAL MARKETS INVESTOR CONFIDENCE INDEX                                                                                             MAY 2005




      DATA
      Calculations of past values for the State Street Investor ConfidenceSM Index are as follows:


      Sep-98 86.4                     Apr-00 109.7                    Nov-01 99.2                      Jun-03      96.9                Jan-05      89.8
      Oct-98      82.1                May-00 97.6                     Dec-01 96.7                      Jul-03 105.4                    Feb-05      89.8
      Nov-98 93.9                     Jun-00 107.2                    Jan-02 100.9                     Aug-03 103.6                    Mar-05      93.2
      Dec-98 99.2                     Jul-00 101.7                    Feb-02 100.4                     Sep-03 102.5                    Apr-05      89.4
      Jan-99      98.2                Aug-00 108.3                    Mar-02       97.3                Oct-03 105.0                    May-05 83.9
      Feb-99      89.9                Sep-00 95.7                     Apr-02       92.2                Nov-03 107.7
      Mar-99      85.7                Oct-00      92.2                May-02 98.1                      Dec-03 109.0
      Apr-99      88.3                Nov-00 87.8                     Jun-02 103.1                     Jan-04      98.6
      May-99 90.1                     Dec-00 94.7                     Jul-02       92.6                Feb-04      93.9
      Jun-99      90.4                Jan-01 108.9                    Aug-02 86.8                      Mar-04      91.7
      Jul-99 102.2                    Feb-01 111.2                    Sep-02 98.3                      Apr-04      92.0
      Aug-99 94.8                     Mar-01 103.3                    Oct-02       98.5                May-04 91.9
      Sep-99 92.3                     Apr-01 107.0                    Nov-02 94.7                      June-04 85.5
      Oct-99      85.8                May-01 101.9                    Dec-02 87.2                      July-04 84.6
      Nov-99 91.5                     Jun-01 102.2                    Jan-03       98.0                Aug-04 86.5
      Dec-99 86.9                     Jul-01      97.0                Feb-03       99.2                Sept-04 84.7
      Jan-00      94.7                Aug-01 95.2                     Mar-03       92.5                Oct-04      89.2
      Feb-00 100.9                    Sep-01 96.1                     Apr-03       93.1                Nov-04 85.5
      Mar-00 109.0                    Oct-01 100.8                    May-03 98.5                      Dec-04 90.1




      PARTNERSHIP
      State Street’s Global Markets business has led the development of fact-based research into investor behavior for the
      benefit of its buy-side and central banking clients since 1995. Founded in 1999, as a majority-owned subsidiary of
      State Street Corporation, State Street Associates develops currency management, asset allocation and portfolio and flow
      research services, and designs strategy tools to support the needs of global portfolio managers. The senior partners of
      State Street Associates are Kenneth A. Froot, the Andre R. Jakurski Professor of Business Administration and director
      of research at Harvard University's Graduate School of Business and founding partner of FDO Partners; Mark Kritzman,
      managing partner of Windham Capital Management Boston; and Stanley W. Shelton, executive vice president,
      State Street Corporation.




MSCI is a registered trademark of Morgan Stanley Capital International, Inc. The Conference Board is a registered trademark of The Conference Board, Inc.

Neither Morgan Stanley Capital International, Inc. nor The Conference Board, Inc. endorse or have any involvement whatsoever with the State Street Investor
Confidence IndexSM.
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                                                                                 INVESTOR CONFIDENCE
                                                                                 INDEXSM PLEASE CONTACT:
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