INVESTSMART GROUP LIMITED — Net Asset Value 2009

Jan 13, 2009

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December 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 ”) as at 31 December 2008 was $0.7986 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 0.92 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index declined by 0.14% in December 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 December 2008 was $0.8801 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of December 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
Mundo Minerals 45% Overweight Seven Network 30% Overweight Westfield -14% Underweight Beach Petroleum 11% Overweight WH Soul Pattinson 9% Overweight			Newcrest 38% Underweight EBB – Alt. Inv Trust -25% Overweight Altium -17% Overweight CBA -15% Overweight Westpac -5% Overweight

The choice is now stark. You can invest your money with the Australian Government for ten years and receive a nominal yield of just under 4% - a figure hitherto not seen in fifty years. Alternatively, you can take on some degree of risk and purchase blue chip shares on an equity earnings yield of around 9% for industrials and a dividend yield of around 6.5%. If you believe earnings will fall 30% over the course of the next year, these numbers are still 6.3% and 4.5% (with tax benefits). For a long term investor, the choice in favour of equities over bonds has rarely been clearer - especially if your choice of equities are the under geared types possessing strong business franchises.

As we know well, each economic cycle produces innovation and structural change such that one cycle’s “strong business” may not be that of the next; media franchises represent the most topical example. We also know that businesses which are “strong” in one economy may be weak in another country, despite apparently similar industry structures. The best practical examples are those where there is a reliance on outside capital, such as banks.

The four major domestic bank franchise holders are likely to be bellwethers for local equities and the Australian economy through their influence on the trends we believe are likely to emerge over the course of 2009:

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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• the price of risk: there are reasonable signs that the type of fear built into risk pricing in mid November is now starting to subside; equity volatility (measured by CBOE VIX index) and credit spread pricing (junk versus Treasuries, inter-bank versus Treasury pricing) is well off worst, although significantly above “normal” levels, and there are good signs that the US new issue corporate bond market is starting to thaw from the frozen environment of Q3 and Q4 in 2008;

• a move into the corporate work out phase : banks’ major issues to date have been in the form of “big ticket” items, with a number of hitherto financial groups now forced to divest assets; the speed and manner in which these assets find new strong owners – who may require some level of debt or equity finance themselves to effect the purchase will be a significant influence on overall confidence – as it was in the 1991 -94 work out phase;

• a move into the real asset work out phase: the same – just residential real estate; over the next few months, the impact of population changes, reduced prices and far lower interest rates will be more graphically seen, with a likely recovery (of which there are a few tentative signs) in the value of already depressed real estate, for example, in the Western parts of Sydney;

• degearing: how aggressively do banks force companies to de-gear, when the cost of debt is so far below the cost of equity, particularly when a shorter term version of “equity risk premium” is built into the equation? This question is particularly pertinent if there are few buyers for the collateral assets other than at vulture prices. Despite some statements about moving into the area, we just don’t see the local banks as equity owners;

• lending practices: the global question of whether banks hoard cash – as appears to be the case in the US, UK and to a lesser degree here – or whether they use the new equity to push loans out. Given the far better position of the employed local consumer relative to (say) May 2008 when the Reserve Bank’s errors were becoming clear to all, the ability to garner cheaper real assets with the assistance of a willing lender is now apparent; and

• earnings visibility: at present – it’s zero, and even more clouded by write-down’s of goodwill and investment holdings which are mandated by accounting regulations. By just after mid-year, we would hope to have a sense of where the bottom of the earnings cycle for domestically influenced industrial companies may be. Analysts remain far too optimistic, in our view, and there will be negative surprises – but many are already factored into prices and it’s mainly fear which takes share prices down when the announcements actually come out – that will gradually subside.

Our portfolio has remained little changed over the past month. We continue to hold a significant bias to the four major banks, at around 10% above their index weight, which is (effectively) being funded by underweight positions in other large caps such as Telstra, Westfield Group and Woodside Petroleum. The first two of these were significant contributors to outperforming the wider market in December. We remain overweight a number of large “discount to asset” situations, a number of which are currently being “reviewed” by advisers to the respective companies, with likely announcements in late February – in essence, a sort of “work-out phase” referenced above. We remain around index weight in the resource area, with slant to the large diversifieds, smaller oils and golds. Over the past month we have nibbled at Telstra in the wake of the sharp price decline subsequent to the NBN issues, successfully traded Lihir Gold and took up part of the much discussed Commonwealth Bank placement.

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 31 December 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	15.08
Westpac	WBC	9.77
National Aust. Bank	NAB	8.81
Commonwealth Bank	CBA	6.36
QBE Insurance	QBE	6.21
ANZ Bank	ANZ	5.57
Woolworths	WOW	5.23
Beach Petroleum	BPT	3.34
Washington H Soul Pattinson & Co LT	SOL	3.13
GPT Group	GPT	2.92
Wesfarmers	WES	2.59
Insurance Australia Group	IAG	2.32
Seven Network	SEV	1.96
Guinness Peat Group PLC	GPG	1.89
Mundo Minerals	MUN	1.55

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