INVESTSMART GROUP LIMITED — Net Asset Value 2006

Jan 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

DECEMBER 2005 NTA RELEASE

13 January 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 30 December 2005 was \$1.14 per share on a before tax basis. This represents an increase of 2.43% over the month, and compares to the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, which appreciated by 3.1% during December 2005. After adjusting for the impact of taxation on realised and unrealised gains, the Fat Fund's after tax NTA at end December 2005 was \$1,0931.

Since inception on 15 April 2005, the Fat Fund's pre-tax NTA has risen from 97.4c per share to 114,00c per share or 17%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 20.15%.

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

Undiluted Net Tangible Asset Backing $$$ ) 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%	$2.2\,$
Since inception			17.05%	20.15%

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 the close on 14 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 December 2005 were as follows:

Positive Influences			Negative Influences
Company	$%$ move	Position	Company	$%$ move	Position
Ammtec Limited	$+18.5%$	overweight	Konekt Limited	$-26.0\%$	overweight
Tribeca Corp.	$+17.9%$	overweight	Perseverance Corp	$-5.9\%$	overweight
Espreon Limited	$+10.7%$	overweight	Clinical Cell Culture	$-22.9%$	overweight
Meteoric Res.	$+25.5%$	overweight	Woodside Pet.	$+12.1%$	underweight
Oil Search	$+6.0%$	overweight	Redflex Holdings	$-7.9%$	overweight

In the main, the Fat Fund has benefited from its stock selections within the major (Top 100) companies, but has endured some volatility within its smaller company exposures, the rationale for which is discussed below. There has been a minor decrement to performance from holding the cash levels noted above in a strongly rising market.

$3.$ Top 15 Holdings

The Top 15 holdings of the Fat Fund as at 30 December 2005 are as follows:

Top 15 Holding by Portfolio Weight as of 30 Dec 2005
Company	Code	Portfolio Weight %
BHP BILLITON LIMITED	BHP	10.9
OIL SEARCH LIMITED	OSH	7.4
ANZ BANKING GROUP LIMITED	ANZ	6.1
REPCOL LIMITED	RPC	6.1
ESPREON LIMITED	EON	6.1
COMMONWEALTH BANK OF AUSTRALIA	CBA	5.6
TRIBECA CORPORATION LTD	TBC	4.2
WESTPAC BANKING CORPORATION	WBC	3.7
PERSEVERANCE CORPORATION LTD	PSV	3.7
AMMTEC LIMITED	AEC	3.6
IMAGE RESOURCES	IMA	2.9
GROPEP LIMITED	GRO	2.9
TOWER LIMITED	TWR	2.6
WOOLWORTHS LIMITED	WOW	$2.2\,$
KONEKT LIMITED	KKT	2.2

4. Portfolio Positioning

The S&P/ASX 300, which is the Fund's benchmark, can be broken down into a simple construct, at the end of December 2005:

• About 48% financials banks, property, insurance, asset managers which could be ٠ deemed interest rate or financial market sensitive;
• About 21% direct resources oil, metal, and bulk commodity producers;
• Around 31% other, of which the main body of stocks have some degree of consumer $\bullet$ related sensitivity.

It's that "other" category which is causing many money managers the headaches, since estimates for profit growth in the area have subsided over the past year, decelerating markedly over the past three to four months. This has been the arena most susceptible to a more parsimonious consumer, beset by higher petrol prices and generally reducing confidence, together with the secondary and tertiary multiplier effects of such behaviour.

Current expectations for profit growth in this area, assessed from major broker forecasts for fiscal year 2006, are now starting to fall below 4%, and seem set to decline further. This contrasts with low double digit growth in the banking sector, and (with wide variance) over 50% expected growth in resource profits.

It's these types of companies that generally have analysts expressing a more cautionary view on equities over the course of the next calendar year. That's hardly surprising - on average these stocks trade on P/E ratios of around 17 - 18x fiscal 2006 earnings. 17x earnings for 4% growth is hardly compelling, given that these companies have come off two years of double digit percentage profit improvement.

Hence, we continue to have a rare – though by no means unknown situation – of searching for appropriate exposure to global growth companies but desiring defensive domestic securities. The intrique for the Manager has been in finding the latter. In common with the 'Fat Prophets" newsletter, we are wary of businesses which are inherently defensive, but where the companies who own them have been financially leveraged to gear up the return to equity holders. There are initial signs of financial engineering starting to come apart in the property industry and even in the domestic oil and gas business. Hence, roadways, property trusts and utilities - inherently defensive assets or businesses - are now difficult to find owned within an appropriate financial structure, thereby potentially cancelling out their defensive characteristics.

This increasing fear of leverage, allied to a general absence of the type of consumer staple or modestly priced (low beta) health care security found in other global equities markets, has seen a drift back to "old faithful" in the area of earnings certainty - banks. Of the ten mainstream and regional banks, only two - National Australia and Suncorp Metway - have underperformed the benchmark in the past six months. This has surprised the "Fat Prophets" writers, though has not dramatically disadvantaged the Fund, since most of our underweight banking position through this period has been in the underperforming National. Neither have we been affected by a massive underweight position in the listed property trust area, which has underperformed the overall benchmark in the past six months.

We are maintaining a strong bias to resource stocks, the overweighting being generally made up of oil, gold and diversified plays, with a bias away from coal producers. However, to date, our stock selection in the area (see below) has been mediocre and our timing - particularly in the gold area - a little slow.

Our methodology to address the "slow domestic growth" ailment has been to seek out a number of smaller companies which have strong growth characteristics, but sensible pricing of such profit improvement. A number of these companies are outside the ASX 300 benchmark, are relatively young, are at an important stage of their development, and are in the commercial services area where they are attempting to take advantage of outsourcing and other "new market" opportunities. It is inevitable that these securities will be more volatile than the average company, and our positions in them are quite large, which means that the Fund's performance on a month to month basis can significantly deviate from the benchmark. Providing we have sufficient diversity and are not overenthusiastic, our most favoured five of these stocks - Ammtec, Coffey International, Espreon, Gropep and Repcol - trade on an average forecast 14x 2006 P/E ratio (less if you do some adjustments to Gropep) - and on our numbers have average EPS growth of over 30% this year.

In January, we have found a number of further companies, towards the bottom end of the S&P/ASX 300 index which also have such characteristics.

5. Company Commentary

IAG is Australia's largest general insurer, with the backbone of the formerly mutual NRMA Insurance (with its two prior acquisitions - SGIO in Western Australia and SGIC in South Australia) being supplemented since the August 2000 flotation by the purchase of Commercial Union's business in Australia and State Insurance in New Zealand.

Our assessment of IAG separated the company into two basic pieces - its insurance businesses and the capital which it is required to maintain to back the business for solvency purposes. This capital is generally invested in growth assets such as equities, which makes the reported profits of the company susceptible to stock market fluctuations.

The group's insurance profitability has improved in recent years as a result of improved underwriting practices and a more diversified business, supplemented by a reasonable attention to costs. Like many businesses, insurance has its own cycles; consolidation in the sector and disciplined pricing of personal lines business has seen a strong increase in profitability for all participants. We view the cycle as coming off its peak, but that margins will remain at above the levels of three to five vears ago.

By separating out the capital used to back the business from the overall value of the company, we deduced that at \$5.00 a share, we were paying a P/E of below 10x fiscal 2005 fully taxed earnings from the insurance business. This is well below the equivalent (and excessive) level of approximately 15x seen when IAG hit its peak share price of \$6.57 in March 2005. The decline in price has been brought about by IAG management's relatively cautious views on the insurance area, adverse publicity regarding its vehicle repair scheme in NSW and an unclear attitude to the approximate \$500m of surplus capital which the group maintains. Our purchase price also represents a close to 6% forecast fully franked dividend vield.

6. Unstapling Date

We continue to remind you that the share and option that make up each stapled security can not be traded separately, until after the unstapling date of 20 April 2006.

We thank you for your ongoing support for the Fat Fund.

Fat Prophets Funds Management (Australia) Pty. Limited Manager - Fat Prophets Australia Fund Limited

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.