INVESTSMART GROUP LIMITED — Net Asset Value 2006

Jul 13, 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

JUNE 2006 NTA RELEASE

14 July 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 30 June 2006 was \$1.1999 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decrease of 1.43% over the month. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, increased by 2.04% in June 2006. After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at end June 2006 was \$1.1482 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 119.99c per share with dividends of 1.2 cents per share representing a total return of 24.4%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 30.77%.

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.

$2²$ Performance Commentary

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

Positive Influences			Negative Influences
Company	% move	Position	Company	$%$ move	Position
Rinker	$-11.4$	Underweight	Espreon	$-29.4$	Overweight
Integrated Gp.	10.0	Overweight	Konekt	$-32.0$	Overweight
Gloucester Coal	14.1	Overweight	Perseverance	$-12.0$	Overweight
OBE Insurance	$-4.3$	Underweight	Brain Res.	$-26.7$	Overweight
Zinifex	$-15.9$	Underweight	Image Res.	$-13.2$	Overweight

It is noteworthy that the negative contribution of the four microcap companies on the right hand side of the table accounted for around 80% of the underperformance versus benchmark during the month.

3. Top 15 Holdings

The Top 15 holdings of the Fat Fund as at 30 June 2006 are as follows:

Top 15 Holdings by Portfolio Weight as of 30 June 2006
Company	Symbol	% weighting
BHP Billiton	BHP	11.98
National Australia Bank	NAB	6.83
ANZ Banking Group	ANZ	6.36
Commonwealth Bank	CBA	5.43
Oil Search	OSH	5.16
Westpac Banking Corporation	WBC	3.59
Tower Limited	TWR	3.58
Ammtec Limited	AEC	3.50
Perserverance Corp	PSV	3.36
Gropep Limited	GRO	3.22
Woolworths Limited	WOW	2.47
Integrated Group	IWF	2.40
Rio Tinto	RIO	2.35
Repcol Limited	RPC	2.34
Espreon Limited	EON	2.31

4. Portfolio Positioning

"Now I will bring chaos to the world"

Kim Jong II (in "Team America: World Police")

"South Park" creators Trey Parker and Matt Stone are responsible for one of many teenage boys' favourite films with its copulating puppets, and satirical assessment of America's role in the world, together with its portrayal of the North Korean leader as the main villain of the peace. Of course, in recent weeks, this "Thunderbirds" type satire has become more realistic, as the North Koreans have added their own contribution to the potpourri of geo-political tension.

The type of volatility seen in Australian markets in June was far greater than even that experienced in May: an average daily move up or down of 1.14% is over twice the average 0.5% of the past year (pre June). After the first eight trading days of June, the index was down over 3%, beset by seemingly conflicting messages from the US Federal Reserve relating to the control of inflation and its likely impact on economic growth. Beyond this point - where some decent panic started to grip the market - punters decided that Fed Chairman Bernanke hadn't lost his marbles after all, and that all would be well with the world.

The main tenet of what we have been writing these past few months revolves around:

• Whether the pricing of long bonds or treasury bills in Australia and the US is $\bullet$ appropriate, given that these are the notional risk-free securities against which equity and other more esoteric asset classes are priced;
• whether the risk premia that investors should be demanding to place their money in specific asset classes is reasonable.

Investors' worst fears, of course, are realised when the risk free instrument is unattractively priced and there is an inadequate risk premium being attached to a specific asset class. If both blow out, that's what causes significant declines in financial asset prices.

In terms of the risk free rate, the inverted yield curve – where short term rates are above their long term equivalents - has been a prevailing phenomenon in Australia for eighteen months now. What makes it different from the last two occasions - 1998 and 2000 - is not only its longevity but the fact that the environment is clearly inflationary and not deflationary as was the case in both those circumstances. Ninety day bank bill rates are now above 6% for the first time since 2000, suggesting markets are pricing in further tightening by the Reserve Bank. There's probably nothing too contentious in this assessment. Where the real argument starts is to the effect of such rises. The bond market is really suggesting that the economy will weaken significantly to justify the steepening inversion in the vield curve. What it is not anticipating is that the economy is weak but is beset with cost push inflation to erode the real value of these long duration securities. There is a clearly similar potential debate in the US, albeit from a position where long term rates are still above their short term Moreover, if we don't see a significant economic slowdown, and inflation equivalents. continues to rear its head, then long term interest rates - the basis from which shares are valued - are highly likely to rise from here.

In the March NTA release, we assessed the phenomenon of risk premia - or lack thereof by reference to a number of emerging markets. Since then, emerging bond and equity markets have been incredibly volatile; the latter have fallen close to 10% from end April - based on the MSCI Emerging Markets index - which has been compounded by currency weakness against the US\$.

There's a strong argument to suggest that geo-political uncertainty is now becoming more acute; the Palestinian/Lebanese/Israeli situation is tenser than for some time, allied to the debacle in Iraq, increasing divergence between the Iranian and "Western" view, allied to a heating up of the dilution in North Korea. This is starting to manifest itself in further increases in gold and oil prices – which should arguably be reflected in high required risk premiums – equal to lower prices for other asset classes, including equities.

That's why, after the strong rally from the low point of the market early in June, that we are again becoming quite negative towards equities. This is exacerbated by the fact that June saw strong rallies early in the month from defensive sectors - listed property trusts and infrastructure (together with their management companies), which certainly suggests a recessionary/low inflation type of environment; intriguingly this defensive stock rally was not snuffed out later in the month, and a number of Top 100 defensive plays saw 5% plus gains in June.

The retracement of commodity prices in June has virtually all been unwound – copper has risen close to 7% at the time of writing from the end of June (when it fell 8% in US\$ terms over the month) whilst nickel has increased by nearly a quarter in less than two weeks. We continue to retain an overweight position in the resource arena within the Fat Fund, and used the opportunity of price falls to move overweight BHP again during the month, though it should be noted that the shares raflied over 16% from where we bought in the space of a month. We remain bullish on oil and gold, and have held our positions despite the volatility these counters suffered in the June period - notably Perseverance Corp. We have added to our oil positions through the purchase of Tap Oil, a smaller oil and gas producer from the Carnarvon Basin in Western Australia with a healthy cash balance and intriguing upcoming drilling program.

The performance of the portfolio in June was badly hampered by the other main phenomenon of the domestic equity market during the period - tax loss selling. This selling tended in smaller companies, and especially in some thinly traded microcap securities. Two of our holdings - Espreon and Konekt - were especially impacted. In both cases, the companies have made announcements exhibiting strong progress in underpinning their 2007 fiscal year profits and long term strategic positioning; both, however, didn't make their forecast guidance for the 2006 year. This appeared to take precedence with investors and both stock suffered close to 30% share price falls over the period, and the largest detractors to our performance.

Since the month end, we have further increased our cash weighting. The portfolio is therefore biased towards oil and gold, less so to other metals, and away from interest rate sensitive defensives and consumer counters. We continue to have a bias to undervalued smaller companies, particularly in the service sector. The major risk to our stance is that there is a massive flight to safety irrespective of its price - which is a phenomenon seen previously in Australian markets, but which inevitably unwinds.

Unlike the Commander Spottswood in Parker and Stone's puppetry epic, in these kind of markets, we won't be "heading back to base for debriefing and cocktails".

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

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
Since Inception			24.42% 4	30.77%

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

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.

$\hat{\mathbf{z}}$ Defined as before providing for the estimated tax on unrealised income and gains in accordance with ASX Listing Rule 19:12. 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