INVESTSMART GROUP LIMITED — Net Asset Value 2006

Jun 13, 2006

Fat Prophets Australia Fund Limited ACN 111 772 359 Level 33, 2 Park St Sydney, NSW 2000 1 300 88 11 77 fatfund@fatprophets.com.au

JUNE 2006 NTA RELEASE

14 June 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 May 2006 was \$1.2173 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decrease of 4.42% over the month. Approximately 1.35 cents per share or 1.06% of this decline was attributable to taxation on realised gains which were generated during the month (see below); adjusting for this realised tax liability would have seen the before tax net asset backing per share fall by 3.36% over the month. Bv comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, declined by 4.74% in May 2006. After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at end April 2006 was \$1.1599 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 121.73c per share with dividends of 1.2 cents per share representing a total return of 26.2%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 28.14%.

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 May 2006 were as follows:

Positive Influences			Negative Influences
Company	$%$ move	Position	Company	$%$ move	Position
Tower Limited	18.3	Overweight	Ammtec	$-17.2$	Overweight
Integrated Group	11.8	Overweight	Repcol	$-15.8$	Overweight
Brain Resource	22.4	Overweight	Coles Myer	6.2	Underweight
Konekt	5.3	Overweight	Sedimentary	$-19.1$	Overweight
Corporate Exp.	5.0	Overweight	Zinifex	15.2	Underweight

3. Top 15 Holdings

The Top 15 holdings of the Fat Fund as at 31 May 2006 are as follows:

Top 15 Holdings by Portfolio Weight as of 31 May 2006
Company	Symbol	% weighting
BHP Billiton	BHP.	10.42
National Australia Bank	NAB	6.72
ANZ Banking Group	ANZ	6.24
Commonwealth Bank	CBA	5.20
Oil Search	OSH	5.03
Perseverance Corporation	PSV	3.77
Westpac Banking Corporation	WBC	3.49
Ammtec Limited	AEC	3.47
Tower Limited	TWR	3.41
Espreon Limited	EON	3.22
Gropep Limited	GRO	3.10
Konekt Limited	KKT	2.81
Repcol Limited	RPC	2.46
Rio Tinto Limited	RIO.	2.32
Woolworths Limited	WOW	2.25

4. Portfolio Positioning

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." J.M. Keynes

For investors under 40 years old, the effects of inflation upon investment markets are observed through old data series, and yellowing year books of BHP accounts with lines of FAVA⁸. This vintage is also required to observe the phenomenon of cost push inflation, rising unemployment and interest rates, a funereal one for investment markets. Inconsistency in the pricing of financial assets is bringing about incredible volatility in many markets, and spurring the speculative, casino-like environment we spoke of last month. Despite the derision of gossip column journalists, we reiterate the warning about equity markets at present - adults only.

In May, volatility in Australian equity markets was acute. The average daily move (up or down) was about 0.86%, compared to about 0.54% over the past year, with five days of over 1.5% movements. This volatility is a function of various global and domestic influences. perhaps distillable to two each:

• Global and Australian equity investors have plenty of profits in their pocket which $(1)$ are capable of being taken, global markets^b have risen approximately 55% in local currency terms since end 2002 whilst domestic investors have seen a 92% total return^c over the same period;

• A fear of the unknown few global investors have any real experience with the type $(2)$ of impact brought about by sustained Chinese growth and investment allied to the opening of other markets; this has brought about genuine destabilisation and massively increased volatility in thinly traded commodity markets;

• Most domestic investors thought the inflation bogey which has been largely absent $(3)$ from the domestic environment for the past fifteen years - and has been priced out of interest rates for the past ten years - would never recur. Seeing it again is a bit like discovering a picture twenty years on of your ex-boy(girl)friend on friendsreunited.com:

• $(4)$ Domestic sentiment is genuinely starting to wobble - the most populous states are the slowest economically, and in particular. NSW has numerous State Government related issues from increasing debt to fund crumbling infrastructure, lack of job growth and a stagnant residential property market.

We can assess the degree to which some of the more sophisticated Australian markets are starting to impute systemically higher levels of inflation. The Australian Government have a few series of Treasury Index Linked bonds on issue (maturities in 2010, 2015 and 2020) which are quoted as a real yield i.e. after inflation. By deducting this real yield from the yield on a similar maturity bond, we have a crude assessment of long term inflation expectations (the assessment is crude due to the relative illiquidity of indexed bonds). At the time of writing, the nominal yield on a 2015 bond is about 5.60% with the real yield on an index bond of similar maturity about 2.45%, suggesting expected inflation over the period of 3.15% per annum. This level of real vield is close to the lowest level seen over the lifespan of our data (thirteen years).

The implied inflation figure is above the Reserve Bank of Australia's 2%-3% target band, and is also the highest such figure since March 2000 - when the inflation figures were distorted by GST and other tax changes. Ignoring such distortions, there is a reasonable argument to suggest professionally priced Australian inflation expectations haven't been this high since July 1996 - when the trend was inexorably downwards. But these expectations do not appear to be adequately priced into other domestic financial assets.

We can perform a similar exercise in the US, to assess inflation expectations using US Treasury Inflation Protected Securities. Using 10 year maturities, expectations have jumped about 1% in the past two years, to a level of around 2.64% at end May 2006. Of concern for Australian investors is the fact that long term inflation expectations have leapt from parity with the US in early 2005 to a high of 0.8% above the US earlier this year and have settled at some 0.5 - 0.6% above US levels at the current time.

This suggests that if this level of inflation expectation is to become more cemented in the minds of investors, then the yield on ten year Australian Government bonds at 5.6% is probably too low. Over the past six years, real yields on index linked securities have averaged just over 3%; add 3% inflation expectations to 3% real yields gives you 6%.

Perhaps investors are focused on sets of "smoothed" numbers which smooth out "unwanted" items from the real world; what is noteworthy is that the difference between the actual Australian Bureau of Statistics CPI numbers and the widely used "excluding volatile items" basis is also at its highest level in sixteen years.

Since the value of any financial asset is the discounted (i.e. present day) value of its future cash flows, systemic increases in the level of inflation expectation have a significant impact on valuations, which are highly sensitive to the rates of interest used in these calculations. The more so in 2006 since the proportion of the Australian market taken up by long term income streams (infrastructure, utilities, property trusts etc) - and their dependent managers has increased dramatically over the last decade. The impact on a speculative environment, where investors have looked further into the future to price particular securities, is similarly draconian.

Implied Australian Inflation (% pa)¹

The global inflation rate wasn't helped in the past month by further speculative gains in copper, zinc and nickel (US\$) prices of 13%, 21% and 24%; on the LME, prices for these metals are up 77%, 104% and 73% respectively in the first five months of 2006. The crazy nature of such gains – and the amazing gyrations in metal markets – was reflected in the 4.1% decline in the All Resources index over the month of May.

Industrial shares fared even worse - down 5.1% in May - beset by interest rate fears, increasingly clear signs of margin squeezes from higher input prices and a parsimonious consumer. Further profit downgrades were apparent in the consumer related area, despite which investors are still happy to pay close to 17x 2006 financial year earnings to garner 5% profit growth in the non bank industrial sector. There seems no recognition that industrial shares are closer to the peak of the earnings cycle rather than the trough. If long term bond rates rise, a P/E ratio of 17x won't last long.

You may think the foregoing analysis reeks of an overly bearish scenario; what needs to be noted is that with parts of the equity market priced for perfection, only minor changes in sentiment towards this opinion will have significant negative consequences for industrial share prices.

During the month, our cash weighting went as high as 11%, in the midst of a further trimming of our resource (mainly metals) exposure and the sale of shares in Rinker and Macquarie Bank; we still remain overweight oil and gold shares and are happy to put up with the inevitable volatility this will cause. The sale of shareholdings in these companies - upon which there were significant unrealised gains - caused the significant jump in realised tax liability during the month, reflected in the so-called "before tax" NTA. Hopefully a realised tax liability in a before tax calculation doesn't leave you too confused.......

In the meantime, we have acquired new shareholdings in two related companies:

• Washington H. Soul Pattinson and Co. (SOL), the venerable^d Sydney based company founded in 1902, which has largely securitised its media, telephony, building material, coal, food and pharmaceutical interests over the past few years. Whilst still an exercise in arcane accounting, it is now easier to break the company's valuation down to its component parts and ascertain that there is a significant discount between the "head stock" and the sum of the parts, many of which are cheap companies in their own right. The company has made a few more mistakes than normal in recent times - notably in the food area - but these are infinitesimal in valuation terms:
• SP Telemedia (SOT), which is 51% owned by SOL, which has fallen by 70% since its peak fifteen months ago, but which owns valuable media licence (NBN 3) and modern telephony infrastructure and contract assets, which appear strategic and undervalued, despite the difficult operating environment for the sector at present. SOT represents only about 7% of WHSP's value at prevailing share prices, which is why we are willing to buy both securities.

These types of securities reflect a slightly more "contrarian" value streak than has been exhibited in the past within the Fat Fund; as we said in the March NTA report, it is likely the fund will be less thematically based over the coming months, with market volatility providing the possibility of the "baby being thrown out with the bathwater". Let's hope so.

Andrew Brown^e Steve O'Hanna^e

On behalf of Fat Prophets Funds Management Australia P/L

• Fixed Asset Valuation Adjustment a:
• b: MSCI World Index - local currency

ASX 300 Accumulation index C.

ď. The antecedent companies were founded as early as 1872; the Millner's - descendents of the original Pattinson family - have been on the board for nearly fourty years and appear to be responsible for the well known homily on corporate offices: "the thicker the carpet, the thinner the dividend".

Andrew Brown and Steve O'Hanna are employees of Trent Capital Limited who currently manage the Fat e: 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 $\text{Tax}^2$	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
Since Inception			$26.21\%$ 4	28.14%

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