INVESTSMART GROUP LIMITED — Net Asset Value 2006

Dec 13, 2006

Fat Prophets Australia Fund Limited ACN 111 772 359 Level 33, 2 Park St Sydney, NSW 2000 02 8258 0015 fatfund@fatprophets.com.au

November 2006 NTA RELEASE

15 December 2006

$\ddot{\phantom{a}}$ Details of Performance and Net Asset Backing at Month end

The net asset backing ("NTA") of Fat Prophets Australia Fund Limited ("Fat Fund") at 31 October 2006 was \$1.2941 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 1.85% over the month. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, rose by 2.37% in October 2006.

After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at the end of November 2006 was \$1.2193 per share, undiluted for the \$1.00 strike price options which can be exercised until 20 April 2008. If all of the options outstanding were exercised immediately, the diluted after tax NTA per share would be \$1.1090 per share.

Since inception on 15 April 2005, the Fat Fund's pre-tax NTA, calculated in accordance with ASX Listing Rule 19:12, has risen from 97.4c per share to 129.41c per share with dividends of 3.3 cents per share representing a total return of 36.25%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 44.30%.

Month by month details of NTA per share and performance since inception are given in the table in the Appendix at the end of this announcement.

$2₁$ Performance Commentary

The major influences on the Fat Fund's performance versus the benchmark during the month of November 2006 were as follows:

Positive Influences			Negative Influences
Company	% move	Position	Company	% move	Position
UXC Limited	22.9	Overweight	Repcol	-60.0	Overweight
Image Res.	11.4	Overweight	OM Holdings	$-71.0$	Overweight
Perserverance	11.4	Overweight	Tower(TAL, TWR&rights)	$-10.0$	Overweight
Coffey	13.8	Overweight	Integrated.Grp	$-12.6$	Overweight
PCH Group	21.1	Overweight	Konekt Ltd	$-14.3$	Overweight

3. Top 15 Holdings at 30 November

Company	Symbol	% Weighting
BHP Billiton	BHP	10.86
National Aust. Bank	NAB.	8.53
Westpac Banking Corp	ANZ	6.40
ANZ Banking Group	WBC	6.37
Commonwealth Bank	CBA	5.43
RIO Tinto Ltd	RIO	4.06
Image Resources	IMA	3.81
Espreon Limited	EON	3.12
Perserverance Corp	PSV	2.80
Ammtec Ltd	AEC.	2.70
Woolworths Ltd	WOW	2.53
UXC Limited	UXC	2.50
Lihir Gold	LHG	2.45
Tower Australia Group	TAL	2.06
Insurance Australia Group	IAG	2.01

$\ddot{4}$ . Portfolio Positioning

It's astounding, time is fleeting Madness takes its toll But listen closely, not for very much longer I've got to keep control.... ....Let's do the Time Warp Again!

from "The Rocky Horror Picture Show (1975)

There is a severe temptation to portray your favourite CEO of a go-ahead investment bank as Dr. Frank-n-Furter as the deals just keep rolling on, and the ASX lurches closer to a 1980's time warp. The November month (and just beyond) on the ASX saw another selection of rumoured, mooted and announced leveraged transactions and investment stakes bought at record high prices for "strategic" reasons. The infectious enthusiasm for generating another set of fees under increasingly spurious concepts sat behind a number of strong performers over the month of November, whilst companies with perceived growth – followed by earnings upgrades - were rated to an even higher plane.

There have been an increasing number of media articles deriding those commentators who have been worried about the extent of re-rating and clear leveraging up which is starting to take place on the ASX. Clearly none of us are sages who know the exact turning points when confidence changes; NAB's CEO, John Stewart has the right idea when he suggests that it will take only one of these leveraged deals to unravel to afflict confidence. 1987 might be a long memory for today's 35 year old tycoon investment banker, but they must remember the contagion effect of October 1997 and 1998.

What's also relevant is the type of math which is being factored into these leveraged plays. Those of us with vellowing copies of Trevor Sykes 1989 book "Operation Dynasty" about the Tryart takeover of Fairfax in late 1987 can see the tabulated growth which these deals are predicated upon: Fairfax EBIT was forecast to be \$420million in 1998 (page 303); uncannily despite further injections of equity and significant business purchases. Fairfax EBIT actually reached \$425million in....2005. (ask an actuary how long seven years is). Oh, but we're much better at estimating and forecasting now computers are more accurate than Bert Reuter's pencil.

The commentators who dismiss comparisons with the late 1980's can clearly point to some significant differences; certainly the level of overall leverage across the equity market is nowhere near as great, nor is inflation anywhere near as pervasive as it was at that time. Credit growth in real terms, whilst arguably reaching a plateau, is not far short of where it was at that time. However, the transmission effects in markets are far more rapid than at that time, and the overall level of consumer leverage can hardly be described as less,

Whilst its the mega deals of Qantas, Seven Network, Fairfax and the property trusts which attract the headlines, the level of speculation elsewhere in the market is pretty heady as well. That's particularly the case in the financial sector where new investment vehicles are being created with gay abandon. The quantum of goodwill being built into these vehicles over and above net asset backing for the ability of the new players to do something with the capital is on the optimistic side. In two cases, relatively new vehicles - Mariner Bridge and Magellan Financial - have inbuilt goodwill values (as at 13/12/06) of \$135million and \$225 million respectively for operations which are only just commencing. Whilst there's little doubting the talents of the individuals concerned, or their connections to mega net worth families, that's a high degree of expectation, particularly given the moderate size of capital pools being managed. There are, of course, innumerable companies with extravagant premiums in the resource sector on the expectation that every "deposit' will become a mine. Read on for a salutary tale of a mining ramp up.

In this type of environment, it's easy to get sucked into the "greater fool" theory where you know something is overpriced but reckon you'll be smart and swift enough to pass it on to the next guy at a higher price. Of course, that's just pass the parcel with financial gelignite.

The Fat portfolio continues to be defensively positioned in respect of buying cheap earnings and an increasing number of discount to asset situations. In the past month, we have bought into CDS Technologies which is effectively liquidating itself with sales of its subsidiary businesses at attractive multiples, and a promise by the Board to return funds back to shareholders in the most tax effective manner. This has followed our purchase a few months ago of Everest Babcock and Brown Alternative Investment Trust at a significant discount to asset backing - which has since closed up nicely. Note we continue to operate the buyback, which is also highly accretive to remaining shareholders. Our performance in November was not too bad considering the lagging share prices of BHP and Rio Tinto, reflecting fears over base metal prices rather than continuing strength in the oligopolistic iron ore markets. We also had to get over the lack of holding "deal" stocks, a complete absence of property trusts from the portfolio and the sale of two securities after further hefty losses -Repcol and OM Holdings.

Repcol delivered vet another profit warning along with the resignation of its CFO. Debt collection companies are increasingly easy to analyse under AIFRS (one of the few sectors that are!), and have a tendency to bounce off their NTA/share if they fall so far. That's logical since most are effectively a principal portfolio attached to a profitable agency business. In our view. Repcol is the exception with slightly less conservative valuations of its principal portfolio. and the Bangalore facility potentially acting as a "poison pill" to any other party interested in purchasing the company. We have also divested OM Holdings after the news of its ongoing problems with the ramp up of the Bootu Creek manganese mine and requirement to restructure the financial facilities underpinning the loss making operation.

The core views expressed in our AGM presentation remain intact, but with an increasing degree of circumspection.

Andrew Brown^a Steve O'Hanna^a

On behalf of Fat Prophets Funds Management Australia P/L

Andrew Brown and Steve O'Hanna are employees of Tidewater Investments Limited who currently manage $a^{\dagger}$ the Fat Fund under a sub-contract agreement dated 15 March 2006

Appendix I: Monthly NTA per share and performance since inception

Month by month details of NTA per share and performance since inception are given in the table below:

Undiluted Net Tangible Asset Backing 1 (\$) as of end:
			Monthly change (pre tax)
	Before Tax 2	After Tax \$	Fat Fund	S&P/ASX 300	% cash
April 2005 3	0.976	0.976	0.21%	$-2.48%$	72.0
May 2005	0.981	0.980	0.51%	3.21%	41.0
June 2005	1.032	1.014	5.20%	4.77%	25.0
July 2005	1.067	1.042	3.39%	2.65%	20.0
August 2005	1.077	1.048	0.94%	2.01%	12.0
September 2005	1.133	1.092	5.20%	5.09%	7.0
October 2005	1.081	1.052	$-4.59%$	$-3.84%$	5.7
November 2005	1.113	1.074	2.96%	4.44%	6.6
December 2005	1.140	1.093	2.43%	3.10%	2.2
January 2006	1.169	1.11	2.54%	3.55%	2.7
February 2006	1.172	1.115	0.26%	0.58%	2.6
March 2006	1.2263(xd)	1.1509(xd)	$5.65\%$ 4	4.77%	4.9
April 2006	1.2736	1.189	3.86%	2.60%	3.9
May 2006	1.2173	1.159	$-4.42%$	$-4.74%$	9.5
June 2006	1.1999	1.1482	$-1.43%$	2.04%	6.2
July 2006	1.1890	1.1425	$-0.91%$	$-1.68%$	9.4
August 2006	1.2050	1.1584	1.35%	3.34%	8.4
September 2006	1.1823(xd)	1.1380	$-0.14\%$ 4	1.31%	8.7
October 2006	1.2706	1.2030	7.47%	4.71%	6.6
November 2006	1.2941	1.2193	1.85%	2.37%	4.5
Since Inception			$36.25\%$ 4	44.30%

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) or Tidewater Investments Limited (the sub contract 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.

The net tangible asset backing stated below is not diluted for the potential issuance of shares arising from the 32.185.001 options expiring on 20 April 2008 which are exercisable at \$1.00 per share.

Defined as before providing for the estimated tax on unrealised income and gains in accordance with ASX Listing Rule 19:12.

Performance from the close on 14 April 2005 to 30 April 2005 starting at NTA of \$0.974 per share

^<sup>4 This number includes the 1.2c dividend that was paid on the 26^th April 2006 and the 2.1 cents per share that was paid on the 24th of October 2006.