INVESTSMART GROUP LIMITED — Regulatory Filings 2008

Jul 13, 2008

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June 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 June 2008 was $1.1178 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decrease of 8.86 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index declined by 7.57% in June 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 June 2008 was $1.1140 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of June 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
Soul Pattinson (W.H) 12% Overweight Lihir Gold 10% Overweight Bravura 7% Overweight Lion Selection -0.3% Overweight Telstra -11% Underweight			Beach Petroleum -20% Overweight Great Southern -56% Overweight Woodside Pet. 3.8% Underweight Fortescue Metals 12% Underweight National Aust. Bank -15% Overweight

Fat Fund shareholders should be panicking that their money managers will lose their nerve and sell off their portfolio of cheap and generally high quality stocks over the next few months - for the buyers to make an awful lot of money over the next two to three years.

With your correspondent having grown up in the 1970’s – and been schooled in the fact that the Bank of England exhorted the UK life institutions to buy shares in January 1975 in the wake of the Burmah Oil – and seen seven bear markets since, the magnitude of fear now exhibited in “industrial” share prices is starting to present exceptional opportunities. This month’s comments focus totally on non resource share returns.

Lets step back a bit, and smooth out all of the noise and minor fluctuations in the industrial (i.e. non resouces) Australian market over the past seventy three years, by simply turning all the moves into an upcycle and then a down cycle. In that time, there have been eighteen bear markets and seventeen bull markets of various magnitudes and durations. In keeping with the statistics from the USA, the average length of a bear market is about thirteen months and it reduces capital values by around 23.5% from the peak; conversely, bull markets last around three years and on average vault 80% in capital terms from the trough. All this is sensible logic – and wonderful symmetry! Over a roughly four year cycle, this has provided a compound growth in capital value of about bang on 8%pa (just over 21%pa up for three years and 21%pa down for just over a year).

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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Most bull markets also show a nice yield return from reinvested dividends which adds upwards of 5% per annum to return; dividends also ease the total return pain in a bear market but roughly by only 3.5% pa.

The industrial share bull market between February 2003 and October 2007 was, in many ways, noteworthy in only two respects:

• its length – 56 months – the third longest up cycle over the past 73 years, rather than stellar per annum returns (about 17.1% in capital terms); and

• given its longevity, the per annum dividend return of 5.5% per annum was relatively high.

The 34% correction in the S&P/ASX300 industrial index since the November 1[st] peak is the fourth steepest bear market since 1935. On a sensible return scale, starting from the very low absolute valuations of the February 2003 trough, the correction suggests that most of the long term spike in the returns of industrial shares had already been wound out of the market by early June. What’s been happening since is a natural reaction to the (severe) deleveraging which is taking place, allied to exogenous factors such as the oil shock and other input price hikes. It does mean that the potential to undershoot certainly exists, but that we are probably in the homeward leg. This run home is likely to occur during and immediately after the results reporting season with downbeat expectations and a few adverse qualitative surprises.

This can be seen in the “fear factor” (or “wall of worry”) which now pervades market sentiment. Securities which have announced disappointing (if realistic) news are aggressively sold to a fraction of their real value, with executives publicly flayed as though they were solely responsible for tilting the planet’s financial markets – playing the man, rather than the game, becomes a feature. Whilst we too were disappointed in the recent GPT Group announcement, it is clear the group now sells at a fraction of intrinsic worth. Similarly, the abject lack of liquidity in most smaller companies, with distress prices for forced sellers of lost mandates, was a material feature of the June marketplace.

The Fat Fund portfolio took some heat in this respect, largely accounting for the underperformance during the month. As we noted in May, highly volatile relative performance over the short term is a feature of turning markets – particularly ones which have been sold down as steeply as this.

Whilst the domestic economy looks dreadful, this is starting to be far better reflected in the forward earnings numbers for larger industrials, as well as their valuations. Expect to see some of these appear in the Fat Fund portfolio over the next few months. However, unlike most nascent bull markets, the next one is likely to be lead out of the doldrums by financials – major banks are cheap and are reasserting their oligopoly pricing (and credit rationing) in a fearsome manner – a fact even noted by the RBA Governor in a recent speech, casting further doubt as to the correctness of the RBA’s actions over the past three years. Additionally, wealth created in many developing countries likes to migrate to developed country arenas, with perceived more stable government, legal and financial systems. That suggests Australian companies with global (and domestic) “hard” assets could be intriguing targets for the new wealthy of China, India and Eastern Europe. Property anyone?

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3. Top 15 Holdings at 30June 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	14.48
National Aust. Bank	NAB	7.12
Westpac Banking Corp	WBC	6.0
Commonwealth Bank	CBA	5.25
Rio Tinto	RIO	3.78
QBE Insurance	QBE	3.61
ANZ Bank	ANZ	3.56
Lihir Gold	LGL	3.47
Lion Selection	LST	3.22
Woolworths	WOW	3.21
Beach Petroleum	BPT	3.12
Soul Pattinson (W.H)	SOL	2.66
Everest Babcock & Brown Alt. Inv. Trust	EBI	2.51
St.George Bank	SGB	2.01
Incremental Petroleum	IPM	1.87

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