INVESTSMART GROUP LIMITED — Net Asset Value 2007

Feb 12, 2007

Fat Prophets Australia Fund Limited ACN 111 772 359 Level 33, 2 Park St Sydney, NSW 2000 02 8258 0015 fatfund@fatprophets.com.au

January 2007 NTA Release

13 February 2007

$\ddagger$ . 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 2007 was \$1.3387 on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 1.77% over the month. By comparison, the Fat Fund's benchmark, the S&P/ASX 300 Accumulation Index, rose by 1.89% in January 2007.

After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund's after tax NTA at the end of January 2007 was \$1,2552 per share, 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 NTA/share would be \$1.1265.

Since inception on 15 April 2005, the Fat Fund's pre-tax NTA, calculated in accordance with ASX Listing Rule 19:12 and so including tax liabilities on realised gains, has risen from 97.4c per share to 133.87c per share with dividends of 3.3 cents per share representing a total return (adjusting for timing of dividend payments) of 41.27%; over the same period, the S&P/ASX 300 Accumulation Index has increased by 52.4%.

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.

$2.$ Performance Commentary

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

Positive Influences			Negative Influences
Company	$%$ move	Position	Company	$%$ move	Position
Image Res.	36.7	Overweight	Espreon	$-12.1$	Overweight
UXC Limited	10.8	Overweight	Beach Pet.	$-20.1$	Overweight
Newcrest Mining	$-20.7$	Underweight	Commander	-9.0	Overweight
Integrated Grp Coffey	15.2	Overweight	Tower Aust. Gloucester	$-8.2$	Overweight
International	7.6	Overweight	Coal	$-10.2$	Overweight

3. Top 15 Holdings at 31 January 2007

Company	Symbol	% Weighting
BHP Billiton	BHP	10.40
National Aust, Bank	NAB	8.50
Westpac Banking Corp	WBC	6.36
ANZ Banking Group	ANZ	6.30
Commonwealth Bank	CBA	5.53
RIO Tinto Ltd	RIO	4.05
Image Resources	IMA	3.79
UXC Limited	UXC	2.74
Woolworths	WOW	2.63
Perseverance Corp	PSV	2.57
Lihir Gold	LHG	2.42
Insurance Australia Group	IAG	2.18
Espreon	EON	2.16
LINO Resources Fund	LRF	2.12
Coffey International	COF	2.06

4. Portfolio Positioning

The Fat Fund's interim results are due out in the next week or so. The results release will contain a longer dissertation on the pricing of the Fat Fund's shares which we are aware is of some concern to shareholders.

In the month of January, the fund was relatively inactive, despite the remarkable volatility in individual stock and commodity prices over the month. It is hardly reasonable to comment on some of the moves since they clearly reflected thin markets and rampant trading by speculators on the back of minutiae. London copper prices fell 10% over the month, zinc by 20%, yet nickel rose by over 14%. The oil price traded in a 23% band over January - \$50 to \$61.50 per barrel.

Not surprisingly, this casino type atmosphere translated itself into Australian markets, where trading is especially thin at this time of year. Not in 2007. Fully one third of the trading sessions saw moves on the day of over 0.9%, and the lure of the tables was such that by the end of the month, the volume of transactions per day was 179,000 - 50% above that of the corresponding 2006 month. At close on \$5billion of value per day - about 40% above January 2006 - the professionals were back at work alongside the penny punters keeping the croupiers busy.

This euphoric atmosphere, which saw the ASX 300 retrace a 2.9% decline in the first five sessions of the year, and turn it into a 2.6% rise at one stage, has continued into February through the initial parts of the results season. This is a real worry. Whilst the Reserve Bank is increasingly of the view that the worst of the inflationary pressures on short term interest rates may be over, potentially lending support to long bond yields (which were remarkably stable over January), this is more than compensated for in valuations.

P/E ratios for major non bank industrial stocks are now over 19.5x 2007 year earnings, the highest your correspondent can remember in a while, certainly at this stage of a profit cycle. There's little solace lower down in the capitalisation range, with smaller industrial shares at over 18.5x this years earnings. Expectations of profit growth remain in the low double digits for the the 2008 year, presumably on the basis that the NSW economy will show greater signs of life after the March election and that the Federal Election - inevitable in the first half of fiscal 2008 - will have no disruptive impact on confidence.

The early parts of the results season have seen a focus on balance sheets and cash flow, with a number of obvious high cash flow, lowly geared companies doing the right thing by shareholders and instigating buybacks, capital returns, much higher dividends or a combination thereof. What's amazing is the lack of foresight of a number of analysts when the numbers stare you in the face. Assessing BHP's cash flow from earnings models is hardly rocket science - the company has roughly forecast EBITDA of US\$19.4billion for the year, pays interest of US\$0.4billion, tax of around US\$4.6billion, to leave US\$14.4billion of cash with which to make the capital management decision of project growth, acquisition, dividend or equity retirement. That's the equivalent of about A\$3.15 per share. Even with US\$7.5billion of capital expenditure, there's still close on US\$7billion to play with. Considering BHP's net debt is only just over US\$9billion, the ability to repay all your debt in just over a year gives great flexibility. Why be surprised that the company made the choice of a massive equity retirement strategy? (see the September 2006 Fat Fund NTA release for details)

The Fat Fund has been very active during February, due to the magnitude of stock moves during the results season. At this stage, we have sold our holding of Corporate Express, where organic growth is slower than we expected but the share price has reacted positively to the company's capital management initiatives.

We haven't exclusively been on the sell tack. There are still a number of interesting asset plays around, in the lower reaches of the equity market. In early January, the Fat Fund took advantage of the depressing effect of a pending option expiry to purchase Ling Resources Fund, a closed end fund investing in developing resource companies, usually through the creation of convertible notes. Ling had grown pre tax undiluted NTA by 66% from IPO, but found their share price languishing at the float level as a result of a 1-1 option entitlement. The shares have rallied close to 10% as the options have been extinguished, despite their exercise virtually doubling the size of the fund.

We are increasing resorting to these simple plays given the excessive valuations which pervade the Australian market, and the type of extreme and unjustifiable volatility seen in January. We continue to be bemused about simple questions of why suppliers to the resource industry are valued at 20+ PER's when the behemoth resource producers - with massive free cash flow - trade at below 9x PER's. At current market valuations, however, we can only reiterate that capital preservation is our overriding priority.

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 Tidewater Investments Limited, a controlled entity of a: which, Tidewater Asset Management Pty. Limited (AFS Licence 302802) currently manages the Fat Fund under a sub-contract agreement dated 23 November 2006.

Appendix I: Monthly NTA per share and performance since inception

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%	$-2.48%$	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	$-4.59%$	$-3.84%$	$\overline{5.7}$
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
July 2006	1.1890	1.1425	$-0.91%$	$-1.68%$	9.4
August 2006	1.2050	1.1584	1.35%	3.34%	8.4
September 2006	1.1823(xd)	1.1380	$-0.14%$ 4	1.31%	8.7
October 2006	1.2706	1.2030	7.47%	4.71%	6.6
November 2006	1.2941	1.2193	1.85%	2.37%	4.5
December 2006	1.3154	1.2388	1.65%	3.67%	6.0
January 2007	1.3387	1.2552	1.77%	1.89%	6.3
Since Inception			$41.27\%$ 4	52.40%

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.

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.

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

^<sup>3 Performance from the close on 14 April 2005 to 30 April 2005 starting at NTA of \$0.974 per share

$^4$ This number includes the 1.2c dividend that was paid on the 26^th April 2006 and the 2.1cents per share that was paid on the 24th of October 2006.