INVESTSMART GROUP LIMITED — Net Asset Value 2008

Aug 13, 2008

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July 2008 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 July 2008 was $1.0531 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decrease of 5.78 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index declined 4.7% in July 2008.

After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund’s after tax NTA at the end of July 2008 was $1.0685 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of July 2008 were as follows (* denotes acquired during month):

Positive Influences	Positive Influences	Positive Influences	Negative Influences	Negative Influences	Negative Influences
Company	%move	Position	Company	%move	Position
Great Southern34%OverweightWoodside Pet.-20%UnderweightWestpac8%OverweightFortescue Metals-27%UnderweightIntegrated Research21%Overweight			Telstra6%UnderweightGPT Group-31%OverweightMundo Minerals-34%OverweightBravura-30%OverweightLihir Gold-17%Overweight

Imagine going to a rugby league game played on a full size pitch between two evenly matched teams, where there were no interchanges - but only ten men on each side. There would probably be a fair amount of action, a large quantum of injuries and the lead would likely change hands on several occasions. A reasonable analogy for the Australian equity markets at present?

Activity on the ASX waned dramatically in July – the average value of each trade during the month was around $12,400 – 46% below the corresponding month last year and compares to the annual average of about $17,500. This lack of activity resulted in wild price swings in response to global sentiment (which itself is swinging wildly) as well as company specific news. Of the Top 100 securities on ASX, one quarter had price movements during the month of 15% or more . This is astounding volatility and is reflective of the level of fear which pervaded the market during the month.

This panic arguably reached a crescendo in mid July, when within twenty four hours around July 15[th] – all around the Freddie Mac/Fannie Mae “bail-outs” - a peak was reached in the oil ($146) and gold ($987.60) prices and Australian dollar (US$0.9850) with a corresponding bottom in the S&P500 (1201) and S&P/ASX 300 Industrials (6123).

FAT PROPHETS AUSTRALIA FUND LIMITED ACN 62 111 772 359

Level 33, 2 Park St, Sydney NSW 2000 telephone 02 8258 0015 fatfund@fatprophets.com.au

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As we laid out last month, that’s why we’re so bullish. Fear has been ruling, and it appears will continue to do so domestically through the results season, but medium to long term value abounds in a number of listed securities. Within the Australian environment one other crucial change has taken place – the Reserve Bank, in its own RBA-speak on 11 August - has finally backtracked on its erroneous interest rate policy stance. This is a critical change since a risk premium was clearly being imputed for “poor monetary policy” and may serve to provide an eventual floor to economic activity in Australia – with a significant lag. If the RBA couldn’t see beforehand that its interest rate stance was incorrect, perhaps the 10c decline in the A$ over two weeks might act as a lesson. Another sign of “hot” money flying everywhere with little view on long term value.

In the past month, as the results season commences, we have made two new investments in cheap “industrial” shares: CSR and Seven Network . CSR is hopefully creating a bit of a coiled spring in housing and construction with its debt financed acquisition of the Pilkington glass business – now expanded and renamed Viridian. There is some risk in the conglomerate in that debt will continue to rise over the next twelve months by dint of below cycle earnings in housing and sugar, added to a generous dividend and aggressive capex programme; at around the $2.00 mark, at around 10x forward earnings and a 7.5% full franked yield, in our opinion, that seemed well discounted.

One of the cautionary things about the pending upturn in stock prices is that we don’t get suckered into “value traps” – companies where a low share price is actually an illusion because the business is in a state of structural decline or is de-leveraging and cannot make the previous returns which arose largely as a consequence of aggressive use of debt. We are extremely cautious about media assets because of the massive fragmentation taking place within the advertising market; recent results from companies such as APN show some very challenging outcomes from even monopoly newspapers (let alone good old non-monopoly printing) but strong growth in some re-worked old stalwarts like billboards.

In the case of Seven Network, depending on the way you want to cut the arithmetic, if you back out the value of cash, shareholdings in listed companies and the strategic stake in WA Newspapers, investors are actually paying nothing for their 47% interest in Seven Media Group, the owner of Channel Seven and other media assets. At book value for the remaining interest in Seven Media Group, the shares are worth close to $13, although stockbroking analysts tend to baulk at the lack of strategic transparency from the board, and attribute mammoth discounts. As a result, the company is looking to buy back 20% of its shares on market over the next year.

This type of accentuated buy back is being seen elsewhere, especially in asset holding company structures where discounts are at excessive levels, given the depressed nature of pricing of the assets themselves. As the Executive Chairman of Seven Network can testify, in the real world its only absolute valuations that matter. In the relative value world of the stockmarket, it’s worth noting that at extreme peaks and troughs, that’s the case as well.

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3. Top 15 Holdings at 31 July 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	14.08
National Aust. Bank	NAB	7.10
Westpac Banking Corp	WBC	6.92
Commonwealth Bank	CBA	5.56
QBE Insurance	QBE	3.89
Rio Tinto	RIO	3.74
Woolworths	WOW	3.54
ANZ Bank	ANZ	3.30
Lihir Gold	LGL	3.07
Lion Selection	LST	2.91
Beach Petroleum	BPT	2.89
Everest Babcock & Brown Alt. Inv. Trust	EBI	2.55
Soul Pattinson (W.H)	SOL	2.50
St.George Bank	SGB	2.20
Incremental Petroleum	IPM	1.74

Andrew Brown[a & ] Steve O’Hanna[a ] 14 August 2008

• 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 sub-contract agreement dated 24 May 2007 with fat Prophets Funds Management Australia P/L.

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.