INVESTSMART GROUP LIMITED — Fund Information / Factsheet 2005

Jul 13, 2005

Fat Prophets Australia Fund Limited ACN 111 772 359 Level 33, 2 Park St Sydney, NSW 2000 1 300 88 11 77 fatfund@fatprophets.com.au

14 July 2005

Net Tangible Asset Backing as of:
	June 30	May 31	April 30
Before $\text{Tax}^{\perp}$ \$	0.032	981
After Tax \$	1.014	.980	-976-
Cash Holdings %			my.

Portfolio Sector Allocation including Cash as of June 30
$GICS$ Sector Positions + Cash S&P/ASX 300 Index	Index $\%$	Fund $\%$	Active Position $pp^2$
Energy	4.3	7.5	3.2
Materials	19.1	16.5	$-2.6$
Industrials	9.2	18.7	9.6
Consumer Discretionary	6.7	0.0	$-6.7$
Consumer Staples	6.7	2.2	$-4.5$
Health Care	3.3	4.6	1.3
Financials	44.1	19.7	$-24.4$
Information Technology	0.7	0.0	$-0.7$
Telecommunications Services	4.4	6.0	1.6
Utilities	1.5	0.0	$-1.5$
Cash		24.7

$^{\rm l}$ defined as before providing for the estimated tax on unrealized income and gains. $^{\rm 2}$ Percentage points

Dear Fat Fund Shareholders.

The Fat Fund's investment portfolio out-performed its benchmark S&P/ASX 300 Accumulation Index for 1 June to 30 June 2005 by 1.1% on a pre-tax³ basis. In dollar terms, the net tangible asset backing after tax rose from \$0.98 to \$1.014 for a gain of \$0.034 per stapled security.

This relative out-performance was the result of stock selection, overcoming the portfolio's decreasing cash drag (as discussed in our last report).

The portion of cash held within the portfolio has fallen from 41% at the end of May 2005 to 25% at the end of June 2005.

Sector Commentary

Now that the Fat Fund is largely invested it is appropriate we share with you the sector make-up of the portfolio. We provide this data for your information only as we do not select stocks via sector exposure. We select stocks based upon value.

Consumer Discretionary

Zero weight. We remain concerned that the slowdown in Australian economic activity is largely reflected in slowing non essential retail spending. Recent interest rate rises combined with house prices moving sideways to down have led consumers to slow the pace of unnecessary debt accumulation. Retailers often have fine profit margins. Any change in revenue can result in a large change in profitability. We anticipate the coming profit release season will show many poor results from this sector.

Financials

Large underweight. This sector includes Banks, Insurance and Property Trusts. Building activity slowdown has made us cautious on valuations despite the high yields offered so we are virtually zero weighted property trusts. We are cautious on the insurance sector given the recent strong out performance of most stocks driven by robust macro drivers, although we have some exposure. Our remaining exposure is from banks, where high fully franked yields and further cost cutting driving earnings upside and we have exposure to global infrastructure spend.

Consumer Staples

Underweight. Although people always have to eat, (no pun intended) some valuations are a little stretched. Our exposure here is a mixture of value and defensive positions.

$3$ defined as before providing for the estimated tax on unrealized income and gains.

Materials

Small underweight, however within the sector we are overweight mining and underweight building materials. The large miners are on low multiples and we see sustained demand growth for metals and minerals as half the world's population (China, India, Brazil, etc) enters the wealth accumulation phase when they consume ever increasing quantities of raw materials.

Industrials

Overweight. Our holding in unique small stock opportunities combined with select infrastructure exposure that has both growth and defensive characteristics dominate our stock selection.

Energy

Overweight. We remain confident the world is now in a high oil price environment, although agree day to day the oil price can be volatile. Oil supply is near capacity constraints in terms of both crude oil and the refining capacity required to turn crude into useable products. Our exposure is dominated by our Oil Search holding as we expect the PNG gas pipeline project will get the full go-ahead in 2006.

Telecommunications

Overweight. Solely via Telstra, where we believe the new CEO will cut costs out and the stock has an attractive fully franked yield.

Healthcare

Overweight. The sector is small and we remain extremely cautious of most stocks due to their cash burn and lack of profits. We can see viable businesses if all goes to plan but significant risks if plans falter, hence the risk reward balance in our opinion is skewed against any involvement, generally. We have found isolated stocks, such as GRO as described below, where we are happy with the present valuation and outlook.

Utilities

Zero weight. A small sector. Where we like the often stable earnings characteristics of many of these stocks however we have yet to find compelling value.

Information Technology

Zero weight. This sector is tiny and to date we have found nothing compelling.

In future releases we will only comment upon a change in our opinion of a certain sector driven always by individual stock analysis.

Company Commentary

We have completed building positions in a number of companies identified in early 2005. Low daily share turnover has necessitated a patient approach of accumulating these shares over a 3 month timeframe, in some cases. We will continue to release commentary on such investments as we complete building the position.

Ammtec (ASX Code: AEC)

Ammtec is a small company specialising in providing complex mineral and metallurgical testing of rock samples for mining projects. Note that this is not the same as assaying, the process of measuring the amount of valuable material in a given sample.

Mining projects send AEC bags of rock from different parts of an ore deposit to be evaluated. AEC studies the way each rock sample responds to:

• crushing and grinding (to first liberate desired minerals from waste rock) and:
• how various metallurgical processes allow separation of the valuable metal or mineral from waste particles.

While small in size by market capitalisation, AEC is one of the largest companies in the world that does this type of work and has conducted tests for projects from dozens of countries

We met with AEC management in Perth in April 2005. We like AEC's business model. Its revenue and profits are not dictated by commodity prices (as is typical of a mining company) but are rather a function of how many mining projects are;

• Moving through the mine pre-development stages of exploration, reserve $\bullet$ definition, metallurgical test work, and finally financing. To obtain financing, typically from large banks, banks insist upon a feasibility study which includes the opinions of experts such as AEC. Banks, increasingly insist on independent and high quality test work as a pre-requisite for lending after recent well document mining project failures.
• Attempting to improve existing processes by analysing new technology options (thereby lowering operating costs). This gives AEC some countercyclical downside protection.

As world demand for resources continues to grow, in our opinion this sector will likely grow at rates above Australian GDP.

We like AEC's competitive posture as it has few competitors even on a global scale and is well regarded by the banks providing project finance to mining projects.

We like the scalability of the business. AEC has spare capacity in its laboratories by way of additional shifts and room to expand lab facilities. In this way, growth can be accommodated without the requirement of significant capital expenditure. Increased revenue will flow largely to the pre-tax profit line.

In our opinion, the biggest risk facing AEC is a sustained fall in commodity prices. In terms of downside protection, we expect AEC to benefit from increased testing work as mining companies seek to develop lower cost processes. AEC's healthy historical dividend yield should prevent a large share price decline.

In terms of additional upside, AEC is experienced with many mineral processing technologies. One of these (resin and ion exchange) may have increasing application in waste clean up and metals recovery situations. AEC has recently taken an equity stake in a company at the forefront of this technology. This upside is not definite at this stage and as such, is not in our base case valuation.

As value investors we like AEC's fundamentals; It's on an estimated low PE $(9x)$ is essentially un-geared and pays out a high proportion of its earnings as fully franked dividends. On 17 June AEC's Board gave guidance for the year ended 30 June 2005 that revenue and profits would be up $40\%$ and 70% respectively compared to 2004.

AEC now makes up 3% of the portfolio.

Gropep (GRO)

GRO is a bio-pharmaceutical company that has positive cash flow, recent double digit revenue growth, profits and in our opinion can continue to grow.

GRO should not be confused with many "biotech" stocks that are typically characterised by a lack of revenue, substantial cash burn and are many years away from regulatory approval by the US FDA (Federal Drug Administration).

GRO's core business is the manufacture of cell culture products. These materials are used by bio-pharmaceutical companies to manufacture specific drug compounds as well as in the discovery and development phase of drug development.

We met with GRO management in late March in Adelaide and again in April in Sydney. We like GRO because demand for its product is increasing.

Bio-pharmaceutical companies are moving away from using animal based media to test and manufacture their products (due to mad cow like concerns), and GRO's product has been found to be more cost affective than animal based ones in many applications.

The holy grail of drug development is FDA approval. This approval process is costly and lengthy. The large drug manufacturers can spend hundreds of millions of dollars on a single drug compound and the process can take up to 15 years. It is important to note that this approval process covers not only the drug itself and it effects on humans, but the entire manufacturing process. If a bio-pharmaceutical company uses GRO's product in its manufacturing process for FDA approval, then it must continue to use GRO's product to produce the product post-approval. (To change would mean seeking re-approval, a process generally too long and costly to consider).

If the drug is successful, GRO gets exposure to the rise in volumes (and thus revenue) that occurs when a new drug gets approved and increasingly prescribed without the high research and development spend (many drugs fail to move through the FDA approval process).

As of June 2005 seven bio-pharmaceutical compounds had achieved regulatory approval using GRO's cell culture product and during a recent public briefing GRO revealed 87 companies have purchased evaluation quantities in the last 12 months.

We like the scalability of the business - GRO has existing spare capacity in its laboratories and growth expectations have seen GRO commit to expanding facilities further to meet demand for the next 5 years. Increased revenue will flow largely to the pre tax profit line.

In addition to its core business GRO has a number of drug compound discoveries that it is moving through the regulatory approval process. Any upside from success with these developments has yet to be put into our base case financial modelling. Importantly it is GRO's intention to move compounds through the low cost early phase of the regulatory approval process and then partner with large pharmaceutical firms to do the more expensive later phase work.

We like GRO's valuation and the fact that it has no debt.

GRO now makes up 3% of the portfolio.

Coffey International (COF)

COF is a medium sized engineering company specialising in geotechnical (soil and rock analysis so that foundations are stable) and overseas development markets (infrastructure projects associated with government aid). Higher Australian infrastructure spend by government and the private sector will require additional investigative work regarding foundations. The Australian government commitment to overseas aid (particularly the Tsunami disaster) will result in considerable spend over the next decade.

COF's share price rose 30% immediately after the Tsunami disaster and we watched it drift back 30% as the market realised the relief spending (on major engineering projects) would not be immediate. This focus, whilst correct, clouded the underlying facts revealed in the financial results released in February 2005 – which showed a rapid increase in profits for the 1^st half.

We visited COF management in March 2005 and modelled the company in detail – confirming in our minds the robustness of the business model and the compelling value present at the then share price.

We liked COF's valuation and its long term business model.

COF now makes up 1.5% of the Fat Fund portfolio.

Tribeca (ASX Code TBC)

Tribeca is a small company specialising in providing educational services to individual and corporate clients. One such business is supplying compliance updates to Financial Planners over the web (a burgeoning sector).

TBC came to our attention after halving in value from February to May of this year. The macro setting for TBC is attractive. Education is an increasing focus for all organisations and is also being driven by an increase in regulatory and compliance obligations. In our opinion this industry will likely grow at multiples of Australian GDP for many years.

We like the competitive environment. TBC competes with many small players (individual private firms, entities providing in-house services for larger corporations and Industry Associations) and can play the role of industry aggregator, capturing economies of scale.

We like the "scalability" of the business. TBC has spent a number of years building an online technology platform that can deliver its services cheaply to many customers. In a situation like this, once the initial development is done and a critical mass of clients obtained, then additional revenue tends to flow largely to the pre-tax profit line. At this point TBC should be able to increase prices to clients above CPI with the difference flowing to the bottom line. Eventually, TBC may consider international expansion facilitated by its technology platform.

Most importantly, we like the valuation. The TBC board recently gave guidance for the year ended 30 June 2005 of EBITDA of \$3.5million. This equates to a PE of approximately 9x 2005 earnings. This compares favourably to the market at 15x.

As of July 13, TBC makes up 2.5% of the portfolio

Stocks Disclosed to Date - Summary

To date we have written about the following stock positions. The weight of these positions within the Fat Fund portfolio is at close of business 13 July 2005.

. Protection Company	ASX Code	Portfolio Weight (%)
Ammtec	AEC	3.0
Coffey	COF	1.5
Gropep	GRO	3.0
Oil Search	OSH	7.4
Repcol	RPC	5.8
Tribeca	TBC	2.5

Ending Notes

You may have noticed that we upgraded our website this past month. New features include:

• access to past NTA releases and commentary
• the ability to obtain a 20 minute delayed price quote via the ASX website
• the ability to examine your security details online via the Registries Ltd website
• the ability to sign-up for our eAlerts service.

This last facility allows current and potential shareholders to provide their email address for use by us in delivering updates $\&$ news, including this report. There is also a 'contact-us' link on the site that we invite you to use in keeping in touch. We are always delighted to answer shareholder questions or entertain suggestions.

We are now entering annual reporting season. Your Fat Prophets Australia Fund Limited annual report will be mailed or emailed to you as per your instructions. The printing of the annual report is an expense of your company. Fat Prophets Australia Fund Limited. Over 700 shareholders have elected to receive the report in electronic format saving the Fat Fund thousands of dollars – increasing shareholder returns.

We'd like you to consider signing up for an electronic version of the report.

If you would like to do so simply send an email to fatfund@fatprophets.com.au with "Sign me up for eAnnual Report" in the subject line. Please include the name in which your investment is held and your address so that we can identify you. We will then have the Registry mail you a form that you may complete to effect the request. Your fellow shareholders and the environment will thank you.

As always, we remind you that the share and option that make up each stapled security can not be traded separately, until after the unstapling date of 20 April 2006.

Again, on behalf of the Board we thank you for your support and look forward to updating you again next month.

Kindest Regards

Your Board of Directors and the Fat Prophets Funds Management* Team

*Fat Prophets Funds Management (Australia) Pty Ltd is the Manager of the Fat Prophets Australia Fund Limited investment portfolio.

This report has been prepared solely for the benefit of the Fat Fund and its shareholders. It summarises information on the financial products held by the Fat Fund and the views of the Fat Fund as at the date of preparation of the report. These views and financial products may and will change after the issue of this report. No assurance can be given by the Fat Fund or Fat Prophets Funds Management Australia Pty Limited (the Manager) as to the accuracy and completeness of the information used to compile this report. Past performance is not necessarily indicative of future performance.

By making this report available, the Fat Fund and the Manager are not providing any general advice or personal advice within the meaning of section 766B of the Corporations Act regarding the Fat Fund, any potential investment in the Fat Fund or any investments or potential investments of the Fat Fund. This report is made without consideration of any specific person's investment objectives, financial situation or needs. The Fat Fund, the Manager and directors and employees of the Fat Fund and the Manager do not accept any liability for the results of any action taken or not taken on the basis of the information contained in this report, any negligent mis-statements, errors or omissions.