INVESTSMART GROUP LIMITED — Net Asset Value 2007

Nov 13, 2007

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October 2007 NTA Release

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 October 2007 was $1.4678 per share EX DIVIDEND on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 0.36% over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index firmed by 2.94% in October 2007.

Adjusting for the payment of 3c/share in final and special dividends during the month, the ASX LR 19.12 pre tax NTA per share increased by 2.46%. This figure also warrants comment since it is struck after 0.9c (0.6% equivalent) per share of tax liability on realised gains (see share sales comments under “Performance Commentary”). Prior to taxes and fees, the portfolio performed in line with its benchmark over the month.

After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund’s after tax NTA at the end of October 2007 was $1.3677 per share EX DIVIDEND , undiluted for the $1.00 strike price options which can be exercised until 20 April 2008. If all of the April 2008 options were exercised at $1.00; the fully diluted after tax NTA/share EX DIVIDEND would be $1.1916.

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of October 2007 were as follows:

Positive Influences	Positive Influences	Positive Influences	Negative Influences	Negative Influences	Negative Influences
Company	%move	Position	Company	%move	Position
Perserverance19%OverweightNational Aust Bank9%OverweightMundo Minerals12%OverweightCoffey Int.12%OverweightBabcock Brown Cap.15%Overweight			Aust. Worldwide Exp.-13%OverweightGreat Southern-5%OverweightNewcrest Mining16%UnderweightQM Technologies-6%OverweightCommander Comm.-31%Overweight

One of your correspondents has been dredging the market for 27 years and never seen value like this. What would you pay for $3.9million in diluted cash, and exploration tenements valued by an independent expert at about $6.4million? $10million perhaps? Well, we are in a mining boom. Maybe $20million? Nonsense! Get with the new math. The answer of course is $167million. Well done to the investor who paid 11c per share for Chameleon Mining NL (ASX: CHM) at the end of October.

This sort of speculative behaviour is generally ignored by mainstream analysts who peddle growth stocks routinely trading on high 20x P/E multiples and tell you “the market is good value on a correction”. To see real value in the Australian market will require the public disposal of the carcass of the seedier end of the resource boom: moose pasture which costs a few thousand dollars to peg routinely offered to shell companies for $4-5million, shell premiums of $10-$20million on resources plays and mooted billion dollar scrip mergers for companies without JORC compliant resources.

This is the sort of speculative scene cavorting below the respectable waterline of the ASX, which is encouraging a more widespread “greater fool” theory, where folks buy overpriced securities in the hope of re-selling them on an even more overpriced basis to bigger mugs. They do it because of meeting a bloke who talks about “weight of money” and their supreme confidence in economic and market conditions. He’s called “greed” and he’s currently on tour in Australia. We prefer his currently excommunicated brother, who’s presently resident in middle America, and making frequent trips to Wall Street. His name’s “fear”.

It’s difficult to remember an environment where the US and Australia were so out of synch in virtually every respect. We understand why (China, maybe) but on the Fat Fund, we are increasingly of the view that October possibly saw some sort of greed crescendo on the ASX. Not just because of the number of AGM’s non bindingly voting against remuneration reports for rapacious management (which genius thought that one up?). The rapid rise of the A$, cost increases accompanied by patchy economic conditions here (and in selected overseas economies where Australian companies have exposures) saw a sombre tone to the AGM season. The market’s behaviour over the month was quite telling: of the Top 100 securities, 27 FELL by more than 5%, with a further 24 RISING by more than 5%, in a market which returned 2.9%. These quantum moves betray a mixture of fear and obsessive trading where a narrowing group of companies delivering on expectations or perceived as a well-spruiked acquisition target are pushed to increasingly zany levels of pricing.

Earnings expectations, are turning from the heights of starry-eyed newly weds to the shrivelled thoughts of urbanised battlers. The contraction in earnings expectations caused by economic factors, strong currency and volatile markets of all genres (e.g. electricity) was particularly marked during October. Consensus forecasts suggest non bank industrial earnings growth of around 8% for the fiscal 2008 year, and a market trading at 18-18.5x these earnings. That’s not cheap. Equally resources shares have been re-rated by dint of corporate activity – real and perceived – despite some sharp falls in particular base metals. At P/E’s of over 15x earnings, and the cycle starting to look a little murkier, the more established shares have probably run ahead of themselves, given overall expected EPS growth of 8% in 2008 – and many large companies likely to show profit reversals of some magnitude from the bonanza of 2007.

Bond rates – with yields below 6% - increasingly reflect the forward view that the Australian economy is likely to taper off dramatically in the wake of bank bill rates above 7%. Three year indexed bonds are offering real yields of 3.3%, and these inflation protected securities are generally imputing inflation rates at 3.2%pa plus across their curve. There is a clear flight to quality in the Commonwealth bond market, and whilst they don’t represent great value, there is an increasing sense that their pricing may be about right. If not, watch out, because we’ll have the combination of factors which spell real problems for equities in Australia: rising bond rates (reducing valuations) and falling earnings expectations.

Adjusting for the dividend payment, and despite our increased cash weighting, the Fat Fund kept pace with the overall index during the month. This reflects yet another takeover offer for a holding (Perserverance Corp), as well as exposure to the defensive banking sector where our two major holdings – National and Westpac – vindicated this status with excellent 2007 results.

We have increased our cash weighting to over 12% at month end to reflect the sales of overweight positions in the two resource leaders BHP and Rio Tinto, as well as the total divestment of Tap Oil which reached our price target. These sales gave rise to a significant tax liability equivalent to 0.9c per Fat Fund share, as noted earlier.

If you are in Sydney on 14[th] December, the Fat Fund AGM is on at the Wesley Centre, 220 Pitt Street at 10.30am. Despite the venue’s proximity to Pitt Street Mall, we hope you’ll hold off your Christmas shopping long enough to stay for the Investment Manager’s presentation after the formalities of the AGM are completed.

3. Top 15 Holdings at 31 October 2007

Company	Symbol	% Weighting
BHP Billiton	BHP	11.3
National Aust. Bank	NAB	8.56
Westpac Banking Corp	WBC	6.78
Commonwealth Bank	CBA	5.95
ANZ Bank	ANZ	5.70
Lihir Gold	LGL	3.77
Woolworths	WOW	3.24
QBE Insurance	QBE	2.91
Soul Pattinson (W.H)	SOL	2.5
UXC Limited	UXC	2.3
RIO Tinto	RIO	2.3
Lion Selection	LST	2.16
Publishing & Broadcasting Limited	PBL	2.16
Mundo Minerals	MUN	1.89
Everest Babcock & Brown Alt. Inv. Trust	EBI	1.89

Andrew Brown[a & ] Steve O’Hanna[a ] 14

November 2007

On behalf of Fat Prophets Funds Management Australia P/L

• a: Andrew Brown and Steve O’Hanna are employees of Tidewater Investments Limited. A controlled entity of Tidewater Investments Limited, Tidewater Asset Management P/L (AFSL# 302802) currently manages the Fat Fund under a subcontract agreement dated 24 May 2007.

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) or Tidewater Asset Management Pty. Limited (the sub contract 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.