INVESTSMART GROUP LIMITED — Net Asset Value 2006

Oct 15, 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

September 2006 NTA RELEASE

16 October 2006

$\ddot{\mathbf{1}}$ . Details of Performance and Net Asset Backing at Month end

The net asset backing ("NTA") of Fat Prophets Australia Fund Limited ("Fat Fund") at 29 September 2006 was \$1.1823 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decline of 1.88% over the month. This number is ex-dividend 2.1 cents to be paid on the 24^th of October 2006, including the dividend the NTA would have declined by 0.14%. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, rose by 1.31% in September 2006. After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at the end September 2006 was \$1.1380 per share.

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.

$2.$ Performance Commentary

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

Positive Influences			Negative Influences
Company	% move	Position	Company	% move	Position
Image Res.	34.4	Overweight	Repcol	$-33.3$	Overweight
DCA Group	35.6	Overweight	BHP Billiton	$-7.5$	Overweight
Coffey Int'l	17.8	Overweight	Sedimentary	$-13.6$	Overweight
Espreon	10.9	Overweight	OM Holdings	$-15.0$	Overweight
UXC	12.5	Overweight	Brain Resource	$-12.0$	Overweight

Top 15 Holdings at 29 September $\overline{3}$ .

Company	Symbol	% Weighting
BHP Billiton Limited	BHP	10.48
National Aust. Bank	NAB.	7.06
ANZ Banking Grp Ltd	ANZ	6.36
Commonwealth Bank.	CBA	5.53
Rinker Group Limited	RIN	4.39
Tower Limited	TWR	3.52
Westpac Banking Corp	WBC	3.47
Ammtec Limited	AEC	3.01
Espreon Limited	EON	2.67
Perseverance Corp	PSV	2.66
Woolworths Limited	WOW	2.46
Suncorp-Metway.	SUN	2.29
DCA Group Limited	DVC.	2.10
RIO Tinto Limited	RЮ	2.10
UXC Limited	UXC	2.00

$\ddot{4}$ . Portfolio Positioning

"Al have I been rebel in myn entente; Now, Mea Culpa, lord! I me repente" - Geoffrey Chaucer "Troilus and Criseyde"

Whilst fourteenth century English lit-erotica isn't your correspondent's normal daily reading (well not since he finished English Lit in 1975), he is honest enough to confess. From a macro-economic perspective, we've not necessarily been on the right track in recent months. The negative commentary in respect of bond yields in mid July (in the June NTA release) served as virtually a perfect inverse indicator; bond prices started to rally (and vields fall) within days, as a stream of perceived weaker economic data - both in the US and Australia was subsequently announced. Such was the market's perception about the data that the rally in vields was quite violent: ten year bond vields in the USA fell from 5.25% in mid July to a recent low of 4.55%; in Australia, the equivalent yield moved from 5.13% to an end September low of 4.87%.

In the Australian equity market, the consequence of such moves is, of course, double edged. Defensive issues with long term income streams such as property trusts, infrastructure and utilities rally whilst (globally) economically sensitive are sold off. Hence, the cost of being overweight such securities is significant. The Fat Fund portfolio is roughly 5% overweight resources shares relative to the ASX 300 benchmark, and has virtually no representation in the "long term income stream" areas - we hold one infrastructure exposure and no REITs.

Together with the ongoing impact of an odd legacy stock (read Repcol), this simply summarises why our performance in the last couple of months has been slightly off the pace. There are signs already in October that bond markets feel their enthusiasm over lower growth was a little too extreme, with yields backing up marginally. Unlike the US, Australian short term rates are starting to reflect the (arguably) less controlled domestic inflationary
environment; we reiterate that slow GDP growth, higher than target inflation and rampant credit growth are incompatible with strong equity markets in anything other than the short term. When you throw in media reform and an increasing level of takeover speculation (plus an exploration boom), there are some similarities with the mid to late 1980's.

Of more encouragement is the fat that markets are starting to be more discriminatory in respect of specific commodities. Supply side responses in copper and (particularly) aluminium have resulted in some dulling of their ardour in price terms, whilst the zinc supply situation remains extremely tight. A significant amount of the geo-political/speculative premium has been kicked out of the oil and gold prices, and we have continued to be choosy about having exposure to companies with genuine growth (acquired or developed) as an offset. Our main gold sector exposure. Perseverance Corp. is emerging as an interesting player in the midst of a potential rationalisation of the Victorian Goldfields, where the latest incarnations of the 1880's gold boom have been more expensive and to date less successful at producing than their antecedents.

Still on the basic materials front, we continue to be enamoured with BHP and Rinker. Both are doing the absolutely correct thing by their shareholders by buying back shares on low multiples of forward earnings. You only need a ten line spreadsheet and three minutes of time to show that a company like BHP earning close to 50% ROE buying back shares at around 8.5x forward P/E ratio is performing a massively accretive act for the remaining shareholders. This reminds us of the banks back in the mid to late 1990's when they had recovered from past travails, started to earn excellent ROE which wasn't properly priced in. They found ways to create new types of (requiatory) capital to retire their own equity base, in a very accretive fashion.

We continue to find selected opportunities to acquire smaller companies on low multiples of earnings, which are not highly leveraged to the economy. Our recent track record in this regard is pretty reasonable (see table below), bearing out the comments that a lack of defensive and exposure to postulated mega-cap corporate activity has been the main cause of recent underperformance:

Company	Date	% change	% ch.	Relative
	Purchased	shares 2	$\overline{\text{ASX}}$ 300 $^3$	performance
CBH Resources	10 Feb 06	67.3	5.8	58.0
Corporate Express	1 Feb 06	$-8.5$	4.0	$-12.1$
DCA Group	21 Aug 06	30.9	1.8	28.6
Integrated Group	10 Jan 06	32.9	7.1	24.2
PCH Group	2 May 06	$-34.9$	4.5	$-37.7$
SP Telemedia	$2$ June $06$	2.7	1.5	1.1
Suncorp Metway	10 April 06	12.6	$-0.8$	13.5
Tassal	28 Mar 06	27.0	1.4	25.3
UXC	10 Jan 06	43.4	7.1	33.9

1: First day of purchase

2: % change since first day to 30 September 2006 - capital only (excludes dividends)

3: from first day to 30 September 2006 - capital index only

In the past few weeks, we have added two further smaller companies - Commander Communications and QM Technologies to the portfolio. Both are in the business services area and have "IT savvy" traits. Commander are a fully integrated telephony infrastructure solutions company best known for the eponymous hardware, with a strong IT consulting exposure post the takeover of Volante. QMT operate in the business process outsourcing area, generally amongst small to medium sized companies, where pricing pressure tends to be less stringent. Both stocks trade on low double digit P/E ratios based on 2007 forecast earnings.

Capital Management

Fat Fund shares have traded ex-dividend of the 2.1 cents final dividend since 20 September 2006. In addition, in the past week, the Fat Fund has purchased a small number of shares as part of the share buy-back. These shares will be cancelled in due course. The fund reports daily to ASX prior to the market opening if the buy back has been active in the preceding day.

Board Composition

The Fat Fund board would like to welcome Angus Geddes who has rejoined the board on 15^th September 2006. Angus is one of the founders of the Fat Prophets independent research company.

Angus is a Director and Chief Executive Officer of the manager (Fat Prophets Fund
Management Australia – FPFMA). The manager will receive a management and performance fee (where relevant) for managing the portfolio.

Angus will have a dual role as a Director with the company (Fat Fund) and the manager (FPFMA). Relevant conflict of interest policies are in place to manage this dual role.

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 Trent Capital Limited who currently manage the Fat a: 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)	$1.1380$ (xd)	$-0.14%$	1.31%	8.7
Since Inception			$24.76\%$ 4	34.59%

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.

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 2.1cents per share due to be paid on the 24th of October 2006.