INVESTSMART GROUP LIMITED — Net Asset Value 2006

Aug 14, 2006

Fat Prophets Australia Fund Limited ACN 111 772 359 Level 33, 2 Park St Sydney, NSW 2000 02 9239 8704 fatfund@fatprophets.com.au

JULY 2006 NTA RELEASE

15 August 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 31 July 2006 was \$1.1890 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decline of 0.91% over the month. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, declined by 1.68% in July 2006. After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at end July 2006 was \$1.1425 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 118.90c per share with dividends of 1.2 cents per share representing a total return of 23.3%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 28.6%.

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 July 2006 were as follows:

Positive Influences			Negative influences
% move Company		Position	Company	% move	Position
Sedimentary	55.6	Overweight	Westfield	6.2	Underweight
Ammtec	9.7	Overweight	Perseverance	$-6.8$	Overweight
Espreon	11.5	Overweight	OBE Ins.	7.6	Underweight
Integrated	96	Overweight	Konekt	$-10.3$	Overweight
Rinker	$-19.6$	Underweight	Telstra	3.8	Underweight

$3₁$ Top 15 Holdings

Top 15 Holdings by Portfolio Weight as of 31 July 2006
Company	Symbol	% weighting
BHP Billiton	BHP	11.54
National Australia Bank	NAB.	7.01
ANZ Banking Group	ANZ	6.08
Commonwealth Bank	CBA	5.51
Oil Search	OSH	4.71
Ammtec Limited	AEC	3.87
Tower Limited	TWR	3.52
Westpac Bank.	WBC	3.42
Integrated Group	IWF	2.65
Perseverance Corp	PSV	2.62
Espreon Limited	EON	2.59
Repcol Limited	RPC.	2.40
Woolworths Limited	WOW	2.35
Rio Tinto	RIO	2.26
Suncorp Metway	SUN	2.05

$\mathbf{A}$ Portfolio Positionina

The past month has seen a fair amount of monkey business on Australia's financial markets:

• The debate over the price of bananas and its impact on the latest inflation numbers:
• Swings in the price of commodities in reaction to geo-political events, notably in the Middle East:
• Analysts slipping on their monkey suits to attend a series of generally disappointing earnings briefings: and
• General grinding down of investor optimism

Australian markets were one of the few developed bourses to post a decline during July with investor confidence being eroded by more domestic than global factors. Subsequent to the month end, these issues have come to the fore with a worrying set of economic statistics illustrating the ongoing dichotomy between "East" (NSW) and "West" (WA). The Reserve Bank has rightly focused on the alarming level of credit growth, especially in the housing sector, against a backdrop of cost push inflation. Any remaining evidence about the subversive nature of the inflationary threat has been seen in a multitude of company reports in August. Companies as diverse as Coca Cola Amatil (soft drinks, snacks) and Corporate Express (office supplies) have noted the impact of cost increases on their business.

The combination of cost push inflation and robust credit growth - housing credit approvals are running close to 23% above the year ago figure $-$ is a horrid one for financial markets. Responsible central bankers will have to keep tightening monetary policy until consumers receive the message to "pull in their horns" – recent signs of consumer confidence suggest this is not currently the case. The Reserve Bank itself notes the impact reduced margins in the consumer lending sector have had on maintaining demand for credit, suggesting it remains surprised by the numbers.

All this suggests that bond rates, whilst having risen slightly over the past month, are still painting a "she'll be right" type of scenario, and have little risk premium to reflect stronger inflationary conditions. If anything they are looking way way into the future to suggest far softer conditions down the track.

Within the Australian market, there is now increasing confirmation of what we have been saying for some months. Projected industrial profit growth is now mundane - less than 5% for the 2006 financial year outside of financials and property with only 6% or so for the new year - but is not priced as such.

There are some signs, however, that domestic markets are starting to become more risk averse. The Emeco IPO (Initial Public Offering) only succeeded at the bottom end of its pricing range (still leaving the private equity players with a handsome premium over peer securities and a four fold profit in eighteen months) whilst the Global Ethanol IPO was cancelled. New issuance of securities, particularly of a more "packaged" nature is proving difficult. The last two "road" floats - Sydney Roads Group and River City Motorway have both listed at discounts to their offer prices.

Of some concern is that this increased aversion is not yet being reflected into the price of a number of financial sector securities; there is still a strong belief that the superannuation funds flow argument will solve all ills, and that high or more 20's type P/E (price/earnings) multiples are perfectly reasonable. Not for us.

Markets continue to be highly volatile even in circumstances where there is NO news. An excellent example of this is the building materials company. Rinker. In May 2006, the shares were trading at well above \$21, reflecting 19.5x forward earnings as quided by the company for the year to March 2007. Since this time, the company has made no change to its 2007 year forecasts, yet saw the shares trade down to a level of 11.4x forward earnings during early August. Whilst the outlook for US housing is increasingly weak - even in the demographically advantaged states which supply the bulk of Rinker's profit – the company's strong exposure to non residential areas should see reasonable stability in earnings. Rinker is displaying a phenomenon we have noted in the resources sector - the ability to earn astounding, never before seen returns on capital (>37% ROFE; > 27% ROE) at this stage of its cycle. The sheer cash flow production from the company should see it continue to return capital to shareholders and increase dividends to shareholders. We have repurchased the Rinker position sold earlier this year and moved significantly overweight at prevailing levels. It's an interesting phenomenon where these basic materials companies are earning returns on capital that are off the scale - but trade on very low single digit P/E's: there so-called growth equivalents reflect the opposite picture with mid-20's multiples and above. One can only surmise that the punters who buy the latter securities are assuming very rapid "fade rates" for the BHP's, Rinkers and Rio Tinto's of the world. We continue to take an inflationary hedged rather than inflationary slowing stance to our portfolio.

In the past month, we have continued to assess a number of smaller resources companies against the background of their quarterly production statements. As a generalisation, the production numbers have been marginally disappointing in both quantity and cost terms. This is providing some opportunities to acquire selected smaller companies, particularly those who have just started production, and are finding the usual problems in the ramp up phase. In this area, we have acquired shares in OM Holdings, which has had a slower than anticipated start to its Bootu Creek manganese operation. The shares have halved in the past six months and now trade at a significant discount to our assessed value.

The current results season is likely to prove volatile if for no other reason than the ongoing conversion of results to AIFRS, with its "mark to market" type approach on both side of the balance sheet. We continued to own shares in Sedimentary Holdings, a gold company whose earnings (but NOT CASH FLOW) were afflicted by this stupid and arbitrary accounting standard in respect of hedging. As the company's share price meandered in response, it has now received an opportunistic takeover offer from AuSelect, a highly discounted closed end gold investor. Good news in the short term, but we are not sure the price reflects long term value, albeit, we are being given scrip and keep an investment in the company.

As our favourite bananas might say:

"Are you thinking what I'm thinking B1?" "I think I am B2".

Andrew Brown and Steve O'Hanna^a

(on behalf of Fat Prophets Funds Management Australia P/L)

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%	$\overline{2.7}$
February 2006	1.172	1.115	0.26%	0.58%	2.6
March 2006	1.2263(xd)	1.1509(xd)	5.65%	4.77%	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
Since Inception			$23.28\%$ 4	28.56%

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.

Andrew Brown and Steve O'Hanna are employees of Trent Capital Limited/Tidewater Asset Management Pty. a: Limited (AFSL # 302802) who currently manage the Fat Fund under a sub-contract agreement dated 15 March 2006

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