INVESTSMART GROUP LIMITED — Regulatory Filings 2008

Mar 12, 2008

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February 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 29 February 2008 was $1.2305 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decline of 3.47 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index declined 0.67% in February 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 February 2008 was $1.2054 per share , undiluted for the $1.00 strike price options which can be exercised until 20 April 2008. If all of the remaining 30,014,630 April 2008 options were exercised at $1.00, the fully diluted pre tax NTA would be $1.1179 per share and the after tax NTA would equate to $1.1051 per share .

2. Performance Commentary

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

	008 were as follows (*		denotes acquired during month):
	Positive Influences				Negative Influences
	Company		%	Position	Company	%	P	osition
			move			move
	QMT Technology		44% Overweight		Woodside Petrol. 23% Under			weight eight weight eight eight
								eigh weig eigh eigh
	Mu U	ndo Minerals Lihir Gold XC Liitd	19% Overweight 17% Overweight 14% Oiht		National Aust Bank -17% Overw Telstra 12% Under QBE I -19% O
	Babc	me ock Brown Cap	verweg 23% Overweight		nsurance ver Lion Selection -12% Overw

The month of February was the pre-cursor to current events, with an atmosphere of fear gripping the wider financial services sector of Australian shares. Remarkably, resources shares rose strongly amidst spikes in a number of base metals, oil, gold and bulk commodities, as well as ongoing takeover activity, increasingly prompted by future customers of the relevant mines. The Fat Fund underperformed the benchmark as a result of its overweight positions in a number of financials (notably NAB and QBE) as well as being underrepresented in strongly performing large caps such as Telstra and Woodside Petroleum. The Fat Fund’s small cap positions were buoyed by a takeover offer for QM Technologies, the BPO company, impact of gold and internal developments on Mundo Minerals, and a strong result from Guinness Peat Group.

The banking sector has been thrashed mercilessly on the basis of three negative factors: margin compression as banks seek to source wholesale funding at higher rates, forecast increased bad debt charges and pressure on capital ratios as earnings fall below expectations and lending growth reverts back to bank balance sheets.

There is little doubt that the “golden era” for bank stocks in Australia has reached a more stressful point; banks have thrived over the past fifteen years on the basis of consistent lending growth, securitisation, cost reduction, modest bad debt charges, and subsequent large scale returns on equity. Accompanied by lower capital requirements, this has enabled banks to retire equity and produce a consistent level of EPS growth.

Whilst these factors have now hit an obstacle, we view it as a speed bump rather than concrete road block. Contrary to some commentators who were in nappies at the time, this is not a late 1980’s/early 1990’s environment for the sector. The major differences of faster transmission, large scale bad debt exposures focused in asset holding companies rather than across the real economy (remember the real companies embedded within Adsteam and Bond Corp), securitised property and not least far lower real interest rates currently prevailing (your correspondent’s first mortgage was at 14%) suggests the sell down in the sector is way overdone. It is acknowledged, however, that the real turn won’t come until analysts sector earnings forecasts are more reflective of current conditions (likely to occur with interim results in May) and when credit spread/default pricing starts to stabilise around its current “fear” levels.

One of the planks towards a mid year bottoming in equity prices has been tentatively installed with recognition by the RBA in its 4/5[th] March presentations of the impact of global financial markets on the economy; it clearly intimates that further interest rate rises are unlikely, which in itself should act to weaken the A$ and provide some stimulation as the year progresses. Maybe they’ll eventually acknowledge what we all know – they got it wrong – rates rose too slowly and its too late now.

Within the Fat Fund, we have taken some profits on Lihir Gold, and reduced our ANZ Bank exposure at higher prices; post month end, we have acquired a new holding in St George Bank at around an 8% fully franked yield and 2008 P/E in single digits. With past net sales, our cash position is around the 7% area, providing scope to carefully accumulate.

3. Top 15 Holdings at 29 February 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	12.0
National Aust. Bank	NAB	7.08
Westpac Banking Corp	WBC	6.39
Commonwealth Bank	CBA	5.03
ANZ Bank	ANZ	3.82
Rio Tinto	RIO	3.49
Woolworths	WOW	3.47
QBE Insurance	QBE	3.32
Lihir Gold	LGL	2.88
Beach Petroleum	BPT	2.72
Soul Pattinson (W.H)	SOL	2.44
Lion Selection	LST	2.40
Mundo Minerals	MUN	2.05
Everest Babcock & Brown Alt. Inv. Trust	EBI	1.96
UXC Limited	UXC	1.93

Andrew Brown[a & ] Steve O’Hanna[a ] 13 March

2008

On behalf of Fat Prophets Funds Management Australia P/L

• 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 subcontract agreement dated 24 May 2007.

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.