INVESTSMART GROUP LIMITED — Regulatory Filings 2008

Feb 12, 2008

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January 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 31 January 2008 was $1.2747 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents a decline of 8.63 % over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index declined 11.0% in January 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 January 2008 was $1.2318 per share , undiluted for the $1.00 strike price options which can be exercised until 20 April 2008. If all of the remaining 30,020,150 April 2008 options were exercised at $1.00, the fully diluted pre tax NTA would be $1.1405 per share and the after tax NTA would equate to $1.1185 per share .

2. Performance Commentary

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

Positive Influences			Negative Influences
Company	%	Position	Company	%	Position
	move			move
Lihir Gold	3%	Overweight	Image Resources	-26%	Overweight
Integrated Research	15%	Overweight	UXC	-21%	Overweight
Allco Finance Uns.Nts	-46%*	Overweight	Newcrest Mining	6%	Underweight
Perseverance Corp	3%	Overweight	Bravura Solns	-30%	Overweight
Australian W/Wide Exp	2%	Overweight	CoffeyInternational	-18%	Overweight

The New Year Stocktake sale of shares turned into a noisy “Liquidation Special” as the less attractive “inventory” which had been built up over the last four years was purged in an aggressive manner. The destruction of some paper fortunes of shareholders in highly geared financial conglomerates was reminiscent of October 1987, as available liquidity to such companies dried up dramatically. The ability of the equity market to “vulture” such companies and then gleefully pick over the carcass has undoubtedly been magnified and accelerated by short-selling capability; despite the shrieks of horror, all this has done is create greater short term volatility, not compromised the inevitable fact that many of these companies were ludicrously over-valued, lived off short term debt (at low margins) and sought to capitalise asset sale profits at ludicrous multiples.

The Fat Fund fell by far less than the benchmark as a result of defensive positioning within the major shares – including a significant overweight to gold bullion which rose strongly over the month - some sensibly chosen smaller companies, and an aggressive trading strategy as the speed of the equity market’s decline – down 12 successive days between 7[th] to 22[nd] January, at which time it had fallen over 18% during the month – was clearly excessive. By 22[nd] January, the Fat Fund was fully invested having spent around 10% in cash during the month topping up a variety of quality companies such as Guinness Peat Group and QBE Insurance , as well as acquiring a new stake in Macquarie Bank (which we hope should find a way to make money out of this dislocation). By the end of January, we had raised a small amount (4% of fund) in cash and continued the aggressive Fat Fund share buy back.

The outlook for the market remains difficult, with improved valuations likely to be comprised by rising uncertainty regarding the earnings outlook. There are some definitive changes to earnings with the impact of “mark to market” valuations in certain sectors, rising interest rates, and a clear increase in the general level of uncertainty in the Australian economy, as consumers look aghast at the Reserve Bank’s likely strangling of what’s left of confidence with a further probable interest rate rise. If the US Federal Reserve are “behind the curve”, it looks like the RBA are still trying to work out whether its sine, cosine or a Lissajous parabola. Whilst the divergence is by no means as marked as in the US, there is sufficient difference between analyst “bottom-up” estimates and strategists’ “top-down” forecasts to suggest there to be further legs down in forward earnings yet to come. Taking past cycles as a guide, suggests the real bottom for Australian shares is likely to be closer to the middle of calendar 2008, when these earnings and rate adjustments have been more fully encapsulated.

Whilst all the action was focused on equity markets, debt markets were starting to set a platform for the repricing of corporate liquidity – once they re-open. The spread between the yields on “junk” US corporate debt and Treasuries blew out considerable in January to over 700 basis points (that’s up from 250 in June 2007) as Government rated paper saw a flight to safety. That’s nicely above the average over time of about 500-550 basis points and suggests as the default rate on corporate bonds increases from a slowing US economy, there will be some debt related bargains to be had (the spread got to 1100 basis points in late 2002). The Fat Fund bought its first piece of distressed debt ever, with the acquisition of Allco Finance Floating Rate Unsecured Notes (“AFGHA”) at below 30cents in the dollar. If this leasing based financial conglomerate survives through to November 2017 when the notes mature, the Fat Fund will glean a yield to maturity of around 40% (and an income yield of 23%) at its purchase price. The notes will likely have to be attended to in any reconstruction of Allco Finance, rumoured but unannounced at the time of writing.

3. Top 15 Holdings at 31 January 2008

Company	Symbol	% Weighting
BHP Billiton	BHP	10.88
National Aust. Bank	NAB	8.24
Westpac Banking Corp	WBC	6.80
ANZ Bank	ANZ	5.90
Commonwealth Bank	CBA	5.72
QBE Insurance	QBE	3.97
Woolworths	WOW	3.35
Rio Tinto	RIO	3.04
Lion Selection	LGL	2.64
Beach Petroleum	BPT	2.52
Soul Pattinson (W.H)	SOL	2.43
Lihir Gold	LST	2.39
Mundo Minerals	MUN	1.93
Everest Babcock & Brown Alt. Inv. Trust	EBI	1.93
Perseverance Corp	PSV	1.76

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