INVESTSMART GROUP LIMITED — AGM Information 2006

Nov 12, 2006

Fat Prophets Australia Fund Limited Annual General Meeting 2006 Manager Presentation

Andrew Brown

(Director, Tidewater Investments Limited)

13 November 2006

Disclaimer

• The material in this presentation is prepared by Tidewater Asset Management Pty. Limited ⋗ ("Tidewater") on behalf of Fat Prophets Fund Management Australia Pty. Limited ("FPFMA") in good faith based on the facts known to it at the time of preparation and does not purport to contain all relevant information in respect of the Financial Products to which it relates. It is current as at the date of this presentation unless otherwise stated. Any projections are estimates only and may not be realised in the future. Tidewater/FPFMA has prepared this report for Fat Prophets Australia Fund Limited ("FATS"). It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or particular needs ("Objectives") of any individual investor. Accordingly, no investment security mentioned in this presentation or in the material should be taken as an investment recommendation.
• $\geq$ Nothing in this research will be construed as a notification to buy or sell any Financial Readucts. or to engage in or refrain from engaging in any transaction in a Financial Product. This reserved is based on information obtained from sources believed to be reliable but Tidewater/FPFMA does not make any representation or warranty that it is accurate, complete or up to date. Tidewater/FPFMA accepts no obligation to correct or update the information or opinions in it. Any persons relying on the above information does so at their own risk.
• Tidewater/FPFMA disclaims liability for all loss or damage whatsoever arising from any use of this $\blacktriangleright$ material or its contents or otherwise arising in connection therewith, notwithstanding any error or omission including negligence.
• All data in this presentation is for periods ended or as at 31. October 2006 ⋟

What are we trying to do

• Preserve capital
• Provide medium to long term capital gain and dividend income
• Outperform S&P/ASX300 benchmark over the medium term ➤
• $\triangleright$ Assist the Board with an appropriate and value accretive capital management strategy
• $\triangleright$ Invest across the broad spectrum of the ASX
• $\triangleright$ Use the "Fat Prophets" report in a structured fashion

• Changed tax ruling TR 2005/23 potentially disadvantages LIC's
• New AIFRS accounting standards ("mark to market") ➤

• David Shearwood has left FPFMA (the manager)

• Sub contract agreement to 20 April 2008 with Tidewater $\blacktriangleright$
• $\triangleright$ Enhanced risk assessment of portfolio

Risk enhancements

• Too many large positions in non ASX 300 securities
• Created volatility and liquidity difficulties $\blacktriangleright$
• Now tier portfolio into Top 100/100-300/ex 300 ➤
• Greater flexibility to act and use size of fund ↘
• Preserves ability to invest across the market ➤

Portfolio at 31 October 2006

Market Cap. rank	ASX 300 weighting	FAT portfolio	Difference
Top 100	89.1%	48.6%	$-40.5%$
$101 - 300$	10.9	20.7%	$+9.8%$
> 300	Nil	23.9%	$+23.9%$
Cash	Nil	6.8%	$+6.8%$

Decomposing the bull market

• S&P/ASX 300 returned 125.9% from end February 2003 to end October 2006 (24.9%pa)

• $\triangleright$ Return can be dissected into dividends, earnings growth and "re-rating"
• $\triangleright$ Bond yields were 5% in February 2003 and are now 5.7%
• $\triangleright$ Forward PER on industrials has increased from 13.2x to 16.4x
• $\triangleright$ Resources shares were expecting some magnitude of EPS growth in 2003 but have (rightly) been derated

S&P/ASX 300 (% pa 1 )		Inds.	Res.
Dividends		5.1%	3.8%
Earnings		10.1%	51.7%
"Rating"		6.6%	$-18.8%$
Total		21.8%	36.7%
1:		Returns % pa from 28 February 2003 to 31 October 2006
Source:	broker estimates	Tidewater compilation of selected

Decomposing the last year

• S&P/ASX 300 index composition $\blacktriangleright$ roughly 78% industrials to 22% resources
• $\geq$ 26.3% return by S&P/ASX 300 for year to 31 October 2006
• $\geq$ 40% of industrial return has come from re-rating into a higher inflationary environment
• $\triangleright$ In itself, this suggests caution
• De-rating of $\blacktriangleright$ resource shares leveling out

S&P/ASX 300 (% pa 1 )		Inds.	Res.
Dividends		5.9%	$3.2\%$
Earnings 2		8.5%	36.0%
"Rating"		$9.7\%$	$-4.2\%$
Total		24.1%	35.0%
$\mathcal{I}$ :		Returns % pa from 31 October 2005 to 31 October 2006
2:		Average of 2006 & 2007E years
Tidewater compilation of selected Source: broker estimates

Outlook - Non Financial Industrials

발음 : 17 - 17 - 18 mg

• $\triangleright$ Represents about 43% ് of "industrial" market (34% total index)
• $\triangleright$ Industrial shares now generally not cheap
• $\triangleright$ General constraints of "two-tier" economy, rising input prices
• Bond rates don't reflect further inflation risk – only $1.7\%$ real
• $\triangleright$ Unlikely to see meaningful valuation expansion
• $\triangleright$ Earnings growth numbers arguably optimistic

June year	EPS (%)	PER (X)	Yield (%)
2006	6.0	19.0	4.0
2007E	9.5	17.3	4.3
2008E	11.0	15.6	4.7
Tidewater compilation of selected broker estimates

Outlook - Financials

• $\triangleright$ Financials are 57% "industrials" and 44% of total benchmark index
• $\triangleright$ Preference for banks over others for PE and yield reasons
• $\triangleright$ Insurance rates have fallen sharply in many classes - but stronger management than past cycles
• $\triangleright$ Property trusts are expensive on most parameters
• $\triangleright$ Major banks at difference stages of development/strategies
• $\triangleright$ Smaller banks, fund managers generally expensive

June year	EPS (9/0)	PER (X)	Yield (9/0)
2006	14.0	17.2	4.6
2007E	10.0	15.6	4.9
2008E	9.5	14.2	5.3

Tidewater compilation of selected

broker estimates

Source:

Outlook - Resources

• $\triangleright$ Still a constructive view on most commodities
• $\triangleright$ Preference for gold and selected base metals
• $\triangleright$ BHP and Rio Tinto are doing the right thing by shareholders buybacks are a good strategy
• $\triangleright$ Diversified oil exposure
• $\triangleright$ General preference for larger stocks

June year	EPS (%)	PER (X)	Yield (%)
2006	55.0	13.1	2.1
2007E	27.0	10.3	2.4
2008E	$-4.0$	10.7	2.4
Tidewater compilation of selected Source: broker estimates

sector		Selected stocks held
Large resource stocks	Strong cash flow, capital discipline, tight commodities	BHP, RIO
Smaller oils	Production growth, exploration upside	AWE, TAP,
Selected banks	Recovery strategy	NAB
	Excessive discount	WBC
Services to industry	Strong growth at lower valuations	UXC, COR EON, OMT
Discount to asset stocks	Lower volatility investment companies	SOL/GPG, EBI, LSG, AUS, FAT

Sectors we're not so keen on

sector
Media	Excessive (corporate) valuations, slow growth, industry threats
Infrastructure/utilities	Excessive valuation, bond yields too low
Retail	High valuations, cyclical & structural threats
Healthcare	High (corporate) valuations

Largest positions against benchmark

Capitalisation ranking	Exposures (alphabetical)
Overweight Top 100	ANZ, BHP, DCA Group, Lihir, National Bank, Rio Tinto, Westpac
Underweight Top 100	Westfield, Telstra, QBE Insurance, Macquarie Bank, AMP
Overweight 101 - 300	Coffey Int'l, Corporate Express, Gloucester Coal, Integrated Group, Perseverance Corp, Tower, UXC
Overweight $> 300$	Ammtec, Espreon, GPG, Image Resources, Konekt, Tassal

Selected non Top 100 Exposures

sector		Sector
Resource Producers	AWE, TAP Oil Beach Petroleum Gloucester Coal OM Holdings Perseverance Corp	Oil & gas Coal Manganese Gold
Resource related	Image Resources, Metgasco Auselect, Lion Selection Ammtec, PCH Group	Developer Investors Services
Industry & outsourced services	Commander Comms Corporate Express Espreon Integrated Group Konekt QM Technologies. UXC	Telephony/comms Office supply Legal Services Labour hire Workers Comp BPO Consulting, utility

Conclusion

• $\triangleright$ Overall market returns likely to be lower
• $\triangleright$ More disparity between sectors/companies will emerge
• Care required in resource sector $-$ some signs of frenzy ➤
• $\triangleright$ Private equity money can be a distorting factor
• Inflation is public enemy $#1$ and needs to be watched -➤ remember the 1980's
• $\triangleright$ New accounting standards emphasis on cash flow
• $\triangleright$ We aim to use Fat Fund's flexibility