INVESTSMART GROUP LIMITED — Net Asset Value 2006

Nov 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

October 2006 NTA RELEASE

15 November 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 \$1.2706 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 7.47% over the month. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, rose by 4.71% 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 October 2006 was \$1.2030 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 \$1.1011 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 127.06c per share with dividends of 3.3 cents per share representing a total return of 33.84%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 40.93%.

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 October 2006 were as follows:

Positive Influences				Negative Influences
Company	%	Position	Company	℅	Position
	move			move
Image Res.	113.4	Overweight	Rinker	33.5	Underweight
Espreon	28.6	Overweight	Zinifex	29.1	Underweight
Metgasco	37.5	Overweight	Perserverance	0.0	Overweight
Tassal	20.6	Overweight	Integrated Grp	$-1.3$	Overweight
Westfield	$-1.0$	Underweight	Suncorp	$-5.2$	Overweight

$\overline{3}$ . Top 15 Holdings at 31 October

Company	Symbol	% Weighting
BHP Billiton	BHP	10.62
National Aust. Bank	NAB	6.98
ANZ Banking Group	ANZ	6.54
Westpac Banking Corp	WBC	6.33
Commonwealth Bank	CBA	5.49
RIO Tinto Ltd	RIO	4.32
Image Resources	IMA	3.74
Tower Limited	TWR	3.56
Espreon Limited	EON	3.23
Ammtec Ltd	AEC	2.67
Perserverance Corp	PSV	2.53
Woolworths Ltd	WOW	2.39
UXC Ltd	UXC	2.04
DCA Group Ltd	DVC	1.99
Insurance Australia Group	IAG	1.95

$\ddot{4}$ . Portfolio Positioning

"He was a genius at extracting money out of people. He would understand the psychology of people bankers, brokers, analysts - and give them exactly what they wanted to hear. He was like a snake charmer.......Nothing was ever accidental. It was always planned."

Stefan Borzecki (ex Qintex investment manager about Christopher Skase) (taken from "the Bold Riders" by Trevor Sykes pp326)

October 2006 looked like a replay of October 1986. Deals galore in sexy areas such as media, travel, gold and (well some us find it interesting) insurance. A pot-pourri of asset swaps, regearing, power plays, strategic positioning ahead of the end game. A \$20million Government campaign designed to entice you to buy shares in a telco whose strategic gameplan is effectively the opposite of Government policy. So exciting you can barely sleep.

Your correspondent can't sleep because environments like this inevitably end in tears. The fact that all this excitement is being generated three years and eight months into a ferocious (global) equity bull market doesn't really make any sense. You might coin it a "dentist's market". There's lots of planning, examination, uttering of words you only half understand, but which sound convincing, and then your senses are rendered unconscious and the extraction takes place. Not teeth, but money.

At the FATS AGM on 13 November, we noted that around 30% of returns from industrial shares in the current bull market (21.8% per annum from February 2003 to end October 2006) had come from "re-rating" – effectively an expansion of PER's as opposed to dividends or earnings growth. That's fair enough, when one considers the bearish state of affairs at that time. However, in the past twelve months, fully 40% of the return from industrial shares of 24.1% has come from PER expansion rather than earnings or dividends. Given the maturity of the bull market, that's a major concern.

To expand PER's at this stage would require a genuine belief that bond yields were likely to fall sharply, or that a structural shift towards quantum higher returns on capital was about to take place as a result of economic management or similar. All the stuff we see, if not pointing the other way, certainly shows that we've already had these phenomena, and that they are coming under a greater threat than for some time. In particular, if Australia's inflation bogey where our inflation is greater than that of other developed world countries as it was consistently through the last 70's and 80's - were to genuinely rear its head again, then the premium rating afforded Australian shares versus their global counterparts would rapidly dissipate.

It's arguable that we are coming close to a confluence of strategic and cyclical factors; the benefits of enforced superannuation fourteen years after its introduction and through a lengthy phase of economic expansion are potentially clashing with domestic financial asset prices and availability. It explains why we are spawning so many vehicles to take Australian money offshore - especially in the REIT arena - likewise giving rise to discussion that such flows are distorting property valuations, particularly in selected parts of the US commercial market.

That's as maybe. A more disturbing aspect is the recycling of assets through the superannuation industry at increasing valuations, and massive fee rake-off. The quantum of money now available to private equity groups to effect these activities, supplied by Australian superannuation funds, is worrisome to the listed investor group. Some may proffer that listed investors have abrogated their responsibility by not holding boards of Directors to genuine account (sell rather than stay and arque): your correspondent understands more than most the downside of trying to do the latter. But what's occurring is little different to the left and right hand transacting with each other, assisted by an outsider charging a fee. Despite the vitriol being heaped upon them, the role of the Coles Group board in standing up to this phenomenon maybe warrants closer and more positive examination.

The past month saw a proliferation of such transactions, dominated, of course, by events in the media sector. The only media stock we own (of sorts) is SP Telemedia. We were slightly caught out by another deal, Suncorp's proposal to acquire Promina. We are not enamoured with the supposed benefits to Suncorp shareholders, and believe the preponderance of break fees and effective absence of the driving force of Promina management over the past few years are not positive influences. We sold our Suncorp shares as a result, having made an above benchmark return.

Maybe we just don't like "deals", since we unfortunately sold our Rinker holding about a week before the Cemex offer. We made good money, but left a pot of gold on the table for the next man.

Since the month end, we have reinforced our exposures to two banks - NAB and Westpac prior to their results. NAB's numbers continue to bear out our investment case, whilst Westpac are far too cheap against their peers, particularly now the period of competitive introversion at the bank appears to have come to an end. These very large cap exposures provide a counterpoint to some of the smaller company holdings, many of which have done well over the past few months, particularly so in the month of October.

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: 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 $\text{Tax}^2$	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
Since Inception			$33.84\%$ 4	40.93%

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.

^<sup>3 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.