INVESTSMART GROUP LIMITED — Net Asset Value 2006

Feb 12, 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

JANUARY 2006 NTA RELEASE

13 February 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 January 2006 was \$1.169 per share on a before tax basis. This represents an increase of 2.54% over the month, and compares to the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, which appreciated by 3.55% during January 2006. After adjusting for the impact of taxation on realised and unrealised gains, the Fat Fund's after tax NTA at end January 2006 was \$1.11.

Since inception on 15 April 2005, the Fat Fund's pre-tax NTA has risen from 97.4c per share to 116,90c per share or 20%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 24.43%.

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%	$-0.81%$	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	1.110	2.54%	3.55%	$\overline{2.7}$
Since inception			20.00%	24.43%

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 and which are stapled to the shares of Fat Prophets Australia Fund until 20 April 2006

^<sup>2 Defined as before providing for the estimated tax on unrealised income and gains.

^<sup>3 Performance from 15 April 2005 to 30 April 2005 starting at NTA of \$0.974 per share

$\overline{2}$ . Performance Commentary

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

Positive Influences			Negative Influences
Company	$%$ move	Position	Company	% move	Position
Gropep	$+15.6%$	overweight	Repcol	$-5.9%$	overweight
Image Resources	$+15.8%$	overweight	Konekt	$-14.1%$	overweight
BHP Billiton	$+13.4%$	overweight	Brain Resource	$-18.9%$	overweight
Westfield	$-2.5%$	underweight	Woodside	$+15.4%$	underweight
Toll Holdings	$-24.0\%$	underweight	Clinical Cell	$-25.9%$	overweight
			Culture

In the main, the Fat Fund has benefited from its stock selections within the maior (Top 100) companies, but has continued to endure some volatility within its smaller company exposures.

$\overline{3}$ . Top 15 Holdings

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

Top 15 Holding by Portfolio Weight as of 31 Jan 2006
Company	Code	Portfolio Weight %
BHP BILLITON LIMITED	BHP	12.00
OIL SEARCH LTD	OSH	6.18
ANZ BANKING GRP LTD	ANZ	6.17
ESPREON LIMITED	EON	5.93
COMMONWEALTH BANK.	CBA	5.65
REPCOL LIMITED	RPC	5.58
NATIONAL AUST. BANK	NAB	4.96
TRIBECA LEARNING LTD	TBC.	4.07
WESTPAC BANKING CORP	WBC	3.72
PERSEVERANCE CORP	PSV	3.71
AMMTEC LIMITED	AEC	3.50
RIO TINTO LIMITED	RIO.	3.37
GROPEP LIMITED	GRO	3.23
IMAGE RESOURCES NL	IMA	3.08
TOWER LIMITED	TWR	2.51

4. Portfolio Positioning

Getting ahead of the benchmark in January could be best characterised as your money being on the horse giving Makybe Diva a three kilo weight pull, four length lead and trying to chase her down over the last 300 metres of a two mile race. Challenging...unless you were on the Diva. It's been well documented that over one quarter of the return of the ASX 300 in January came from BHP alone, and that close to 40% of the return emanated from the "Big Three" resource plays - BHP, Rio Tinto and Woodside.

The stellar performance of these stocks over the past three months has been driven by a blow off in product prices, which is now starting to assume speculative proportions. Copper, aluminium, lead and zinc all rose between $9 - 20\%$ in the month of January, in some cases ignoring a flattening of near term fundamentals, notably higher stockpiles.

It used to be that the first lesson you learned on the Australian market was to put the phone down on the broker that told you to buy MIM on a P/E of 5 - because you knew it was the "top of the cycle". For the believers in the BRIC "supercycle", the issue is not only to assess its metrics, impact on the metals, but to ascribe a sensible capitalisation multiple of earnings to use. NPV's and IRR's at the present stage aren't much use to investors in these stocks they are overly reliant on assumptions of product price; on a conservative basis, such metrics are best used to aid to the companies in assessing the underlying basis of allocating capital.

Blowing the dust off your correspondent's copy of "Australian Mining Review: Mining Boom 1981 Edition", the last time we were in the clutches of a resource price driven bull market. BHP's P/E topped out at about 12x adjusted net profit (adding back the inflation accounting adjustments they used to make). CRA as it was then, topped out at about 17x earnings, and MIM at 14.3x. The big difference now, of course, is the returns the companies make on shareholders funds or invested capital. In 1980, BHP's peak profit produced a return on shareholders funds of 15.3%, with CRA at about 14.7%; the two companies in the current year should produce respective returns on equity of roughly 50% and 40%. The bulk of BHP's percentage return metrics per dollar invested are currently around three times what they were in the 1980 peak, providing an internal capital management based driver for returns to stay higher for longer.

The rapid rise in share prices across the resource sector over the past three months is symptomatic of a market which is giving up looking for the more difficult domestic ideas. frightened by earnings downgrades, and tooking for the "easy" resource money. As we noted last month, the domestic situation is very tough in the consumer dependent area, for which more evidence emerged in January. Two hitherto revered retailers - Colorado and Super Cheap Auto – not only losing slabs of stock price but also well regarded CEO's. There will be a time, but we own no discretionary retailers or media stocks at present.

In these conditions, there is some level of caution needed and returns will continue to be radically dispersed. We have made some changes to the portfolio, profit taking in the resource area (some done post month end, but we are still well overweight), and trying to find strong franchises whose share prices have been beaten down by either lack of interest or a spurious short term event. There is some scope to find the odd turnaround play.

Over the course of January and into February, we have made the following new additions to the portfolio, all of which are included in the benchmark ASX 300 index:

• UXC a consulting and utility services company on a forward P/E of 11x;
• Integrated Group a labour hire and training company recovering from accounting "issues" in fiscal 2005 but again on a forward P/E of 11x, with improving growth prospects;
• Corporate Express the dominant supplier of office consumables to corporate and medium sized businesses, which now trades at well below a market multiple despite over 30% returns on equity and sensible expectations of strengthening growth in calendar 2006:
• National Australia Bank discussed below

These positions have been funded by profit taking in the resource area and the cleaning up of other smaller positions.

5. Commentary - contrasting turnaround stories

There are two top ten capitalised company turnaround propositions, each with newish CEO's political overtones and vast numbers of anxious smaller shareholders. They represent a stark contrast.

In this respect, we have closed our significant underweight in National Australia Bank. In Australia's oligpolistic banking market, there is no great reason for one banks return on its total asset base to be radically different to another; differential gearing can, of course change this when it comes to return on capital (equity). The National has a post tax return on assets of about 0.87% which is fully 19 basis points below that of any other major. This represents the ongoing costs impost of APRA regulation, inefficiency caused by past underinvestment, and a plethora of other ills. Getting this figure to the next best bank is the equivalent to \$800m of profit alone (the bank makes about \$3.3billion of after tax profit). In addition, the bank is forced to carry significant slabs of additional equity as penalty for past misdemeanours - depending on your calculations, certainly over \$2billion and potentially as much as \$5 billion.

Unless the current management at NAB are way worse than their peers, it's inevitable that NAB's earnings growth over the next two to five years must outstrip the other banks, as it returns to even modest (not exceptional) metrics within the group. Don't forget, among its peers, NAB has the lowest proportion of revenue coming from personal banking - an increasingly competitive area - and the highest from business banking, where the oligopoly is strongest. The underperformance of NAB versus its peers over the past six months or so has provided a sensible buving opportunity in a turnaround where the regulator is arquably waiting to get off National's back - not climb on to it.

It provides a major contrast to Telstra where the regulatory environment is, at best, murky, and the company has limited potential control of its destiny. Revenue growth is infinitesimal, nimble competitors and technological change attack at every corner. On most numbers, the shares are not especially cheap against global peers, and the mooted dividend attractions are roughly 50% funded from debt, assuming capex of around \$4.5billion in the current year and \$5.5billion in financial year 2007. Telstra's fundamentals simply aren't improving at this juncture - indeed they appear to be getting worse. Recent media articles - notably the Sydney Morning Herald of 1^st February 2006 which suggested a specially designed yield on partly paid share mechanism to virtually force fund managers to buy shares - could almost have been written by the advisors and bankers to a T3 selldown (partly paid shares are effectively a margin loan from the company). Whilst it is unarquable that professional fund managers as a group are very underweight the shares, the fact that Telstra goes to 5% of the benchmark index doesn't mean - other than an index fund - that they have to buy it. Remember that plenty of professionals stayed well underweight NAB for some time. Whilst the supply/demand equation for Telstra shares may technically improve from here, and the charts look attractive, we differ from our friends on the "Fat Prophets" newsletter and remain underweight in Telstra on fundamental grounds.

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.

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.