INVESTSMART GROUP LIMITED — Net Asset Value 2008

Jun 12, 2008

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May 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 30 May 2008 was $1.2265 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 1.59 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index rose by 1.71% in May 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 May 2008 was $1.1927 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of May 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
Beach Petroleum38%OverweightLion Selection21%OverweightSoul Pattinson (W.H)17%OverweightEverest B&B Alt, Inv Tst18%OverweightIncremental Petroleum17%Overweight			Fortescue Metals43%UnderweightWoodside16%UnderweightSantos32%UnderweightMundo Minerals-16%OverweightGPT Group-13%Overweight

Having rallied 17.4% in exactly two months from mid-March to mid May 2008, the benchmark ASX/S&P 300 index receded in the last two weeks of May, amidst further concerns over the domestic economy, and signs of additional rounds of global credit market distress. These fears have magnified subsequent to the month end, with a rampant move in the oil price being accompanied by aggressive selling of conventional bank and brokerage securities in the UK and US, together with their financial engineering counterparts in Australia.

The approximate benchmark performance of the Fat Fund over the month disguises the fact that there were some major share price moves within our portfolio, and the contributions to this outcome – known as attribution – were individually far larger than for many months. It might be called a crude illustration of the benefits of portfolio diversification. We suspect these traits will continue over forthcoming months as the market variously panics about earnings, stagflation and credit risk. There’s little doubt this is the nearest we’ve been to 1974 for a while, though hopefully the lessons of that period have been learned.

The oil sector strategy we documented last month produced a reasonable payoff (for a change) with significant moves in our smaller counters (Beach, AWE, Incremental) offsetting an absence of exposure to Woodside, Santos and Oil Search. This has been partly reversed in the current month with Beach continuing to pursue an aggressive growth strategy through equity issuance. The three of the largest contributors to performance warrant comment since they are all unconventional asset plays. Lion Selection has announced an effective plan to return two thirds of its current value to shareholders in the form of cash (indeed a higher cash payment than the share price at the close of February); the company was our third largest overall

deviation from index due to the cheap nature of its desirable assets and rose 21% over the month. The board of Lion responded to outside pressure, in the form of a takeover offer from Indophil; similar external catalysts and a changing share register have seen positive initiatives by Everest B&B Alternative Investment Trust (a fund of hedge funds) to close the discount to NTA. This is in stark contrast to the other major asset winner last month – Soul Pattinson – who have been able to resist external pressures for the past forty years – generally to shareholders benefit. The venerable old company’s shares have risen 33% in two months, better reflecting the value of its 61% subsidiary New Hope Coal (NHC), and NHC’s associate, Arrow Energy, one of the new breed of CSM players, who have signed an alliance with Shell. There is great irony in the fact we sold our Macquarie Group shares during the month (pre result); in July 2006, Macquarie sold an effective 98million share parcel of Arrow to Souls via NHC at an average price of 62c; they have left around $300million on the table so far.

The activity in Soul shows the capacity to pick up neglected companies; we do our own research on the shares since we don’t know any broker who covers the stock, despite the far more transparent nature of its values than a few years ago. Based on market prices of its investments, we reckon Soul shares are worth close to $14 at present – but do deserve a significant discount to that valuation. For much of the past six months, the discount to value has over 30% - that’s too much.

Andrew Brown, from Tidewater Asset Management, will be presenting on the Fat Fund (and answering other questions) as part of the ASX sponsored LIC roadshows in Adelaide on 2 July, Perth on 3 July and Canberra on 15 July. Go to www.asx.com.au for venue details. If you’re a Fat Fund shareholder, don’t be shy – come and say hello.

3. Top 15 Holdings at 30 May 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	13.04
National Aust. Bank	NAB	7.61
Westpac Banking Corp	WBC	6.31
Commonwealth Bank	CBA	5.0
ANZ Bank	ANZ	3.72
QBE Insurance	QBE	3.56
Rio Tinto	RIO	3.48
Lion Selection	LST	3.38
Woolworths	WOW	3.29
Soul Pattinson (W.H)	SOL	3.17
Beach Petroleum	BPT	3.10
Lihir Gold	LGL	2.84
Everest Babcock & Brown Alt. Inv. Trust	EBI	2.33
St.George Bank	SGB	2.30
Guiness Peat GroupPLC	GPG	1.78

Andrew Brown[a & ] Steve O’Hanna[a ] 13 June 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.