INVESTSMART GROUP LIMITED — Net Asset Value 2009

Jun 10, 2009

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May 2009 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 ”) as at 29 May 2009 was $0.8845 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 2.24% over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index firmed 1.46% in May 2009.

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 2009 was $0.9406 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of May 2009 were as follows (* denotes acquired during month):

were as follows (* denotes acquired during month):	were as follows (* denotes acquired during month):	were as follows (* denotes acquired during month):
Positive Influences			Negative Influences
Company	% move	Position	Company	% move	Position
SP Telemedia 53% Overweight Telstra -6.6% Underweight Premier Investments 15% Overweight Aust. Worldwide Exp. 18.4% Overweight GPT Group 8.5% Overweight			Woodside 13% Underweight QBE Insurance -11.2% Overweight Altium -20% Overweight Seven Network -12.4% Overweight Orica 20% Underweight

We seem to be in an Australian sharemarket, having moved rapidly off its lows, characterised by the wonderful dealers chant “the bears have no shares”. Judging from the gluttonous devouring of virtually any capital raising offer in recent weeks – and of course, the equivalent gluttony of investment bankers pushing out such raising s – the phrase would appear to have some validity.

We are starting to have some misgivings about what is occurring, whilst acknowledging a few obvious positives:

• Australia’s capital markets, thanks to forced superannuation, are large, still domestically biased, and with general underweights in Australian equities relative to past practice, are reasonably able to absorb this demand for capital, steep though it is;

• In certain sectors, notably the REIT area, there is an obvious benefit to the entity in forestalling covenant breaches and other atrocities, eventually reducing cost of capital in the long term – best called the News Corp 1991 effect where you have a capital raising to survive and the shares go up vertically as a consequence;

• Some of the same can be said for selected cyclical industry stocks.

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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Our misgivings are, however, more in terms of pricing. The medium term outlook for the global cyclicals is obviously predicated on developing world growth; China is seen as the panacea for all capital market ills.

Whilst this may well be correct, the Chinese - as illustrated in the current iron ore negotiations – are being rightly hard nosed about ensuring they obtain commercial MFN status. As a consequence, it is clear there are further downgrades to come in a number of globally influenced securities – notably the “Big two” and that pricing at current levels is looking well out into an upturn. The real shortage of counters exposed to the recovery in selected metals prices, allied to the proposed Rio/BHP joint ventures in the Pilbara, are, in our view, starting to leave both company’s share prices rather stretched.

It’s exactly the same picture with domestic cyclicals. The Fat Fund managers really don’t get too excited about paying 12- 14x earnings in fiscal 2011 for a company earning single digit returns on equity (and low single digits on capital, which has usually been written down anyway). We have taken a position in APN News and Media which has some strategically interesting “old-media” assets, which may have greater longevity than those of their peer group and are far cheaper.

The essence of a bear market is that it will hopefully leave excellent companies relatively cheaply priced, whilst also leaving some fabulous Ben Graham “cigar butts” – stocks, which may be in poor industries/assets – trading well below liquidation value (or net current assets). Recent sectoral shifts within the Australian market have, in our view, gone a little too far, as a result of the seeming desperation of underweight fund managers to acquire stocks with perceived earnings upside from 2009- 2012, from improving economic conditions. As a consequence, we have made some interesting shifts within the Fat Fund in recent weeks.

Within the resource sector, we have cut our weightings as a result of the dramatic run up in BHP – having held an overweight stance in the “Big Australian” for the past three years, we have trimmed our position back to index weight. In addition, we have exited the shares of Soul Pattinson , which have served us superbly through the tougher times in the market, and which were our largest non-index position. Whilst Souls trade at a 30% discount to our “market value per share” assessment, close on two thirds of this value is now made up of New Hope Coal and Arrow Energy (on a see-through basis) which have been stellar performers but, New Hope, in particular, seems to us to be no longer cheap in its own right. We added to Newcrest Mining in the gold sector as a more direct play on gold prices and US$ weakness, and still remain one of the few diversified funds who are overweight gold producers as a group.

In amongst our cigar butt asset plays (Seven Network, Allco Equity Partners, Lion Selection, REITs), we have now found room for a great Australian company which is trading on far more modest multiples than seen for years – CSL Limited . We have the US Federal Trade Commission to thank for its robust assessment of the US plasma market, which has now caused the company to walk away from the proposed $3.1billion acquisition of Talecris Biotherapeutics. CSL is debt free with enormous cash flows, which from an EV/EBITDA basis, leave it cheaper than many low grade cyclicals a couple of years out.

The Fat Fund in May benefitted from an overweight position in selected smaller companies, which make up around 25% of the portfolio, and which have generally been outperforming in recent weeks; over 70% of the fund remains in Top 100 stocks, with the major distortions still favouring financials over manufacturing/services and Telstra. Given the gyrations within the market, and the amazing daily moves within individual stocks, we expect our relative performance to be volatile over the next few months, as some of these short term trends push to greater extremes.

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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3. Top 15 Holdings at 29 May 2009

Company	Symbol	% Weighting
BHP Billiton	BHP	13.7
Westpac	WBC	10.0
National Aust. Bank	NAB	7.55
Commonwealth Bank	CBA	7.11
ANZ Bank	ANZ	5.02
QBE Insurance	QBE	4.28
Wesfarmers	WES	4.15
Woolworths	WOW	3.61
GPT Group	GPT	3.04
Rio Tinto	RIO	2.35
Beach Petroleum	BPT	2.35
Washington H Soul Pattinson & Co Ltd	SOL	2.14
CSL Limited	CSL	2.06
Newcrest	NCM	2.06
Allco EquityPartners	AEP	2.04

Andrew Brown[a & ] Steve O’Hanna[a ] 11 June 2009

• 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.

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