INVESTSMART GROUP LIMITED — Regulatory Filings 2009

Oct 13, 2009

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September 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 30 September 2009 was $1.15 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 8.31% over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index firmed 6.26% over the month.

After adjusting for the impact of taxation on both realised and unrealised gains, the Fat Fund’s after tax NTA at the end of September 2009 was $1.1182 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of September 2009 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
Bravura 49% Overweight Premier Invest. 22% Overweight BT Investment Mgmt. 19% Overweight MyState* 16% Overweight Santos -4% Underweight			Beach Petroleum -5% Overweight Macquarie Grp 16% Underweight Oceana Capital -2% Overweight Seven Network -1.4% Overweight Suncorp 13% Underweight

* stock taken up in placement at $2.50

This is all getting a bit hedonistic. The market benchmark has returned nearly 55% from its low point in March this year, and virtually all risk indices have normalised – equity VIX is at close to a year low, junk bond yields are at normal spreads over abnormally low nominal Treasury yields and interbank spreads are back at highly normal 21bp spreads over US Treasuries.

OK. Now go out and sell that commercial building on the valuation you last obtained a few months ago at about a 6.5% yield? What do you mean there are no takers?

It is clear in the real world that if credit was non-existent a year ago, the flood of liquidity which then moved into markets is increasingly tightening. Rates are starting to move up as are credit spreads as applied by banks. Whilst the Australian environment may not be so beset with such assets, it is apparent that many other banking systems (notably in Europe) are working on the premise that hanging onto distressed assets – either on-balance sheet or through supporting distressed lenders – in the hope of asset price inflation over the next couple of years is de rigeur . The relative absence of transactions in real asset markets continues; a year ago this was perceived as horrific but is now viewed favourably, as analysts feel free to attribute their own (potentially illusory) valuations to assets.

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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That we are in the sweet spot of equity markets is (and has been) undeniable – interest rates are low, earnings are bottoming out, there is ample perceived liquidity, and recapitalisation has now taken place. To be frank, it looks like an amphetamine fuelled re-run of the early 1990’s, albeit at far lower interest rates, and as we noted last time, into a re-regulating environment. We’re now getting the other two prerequisites which could push the market to really unhealthy levels: lower quality fund IPO raisings as private equity unwinds the last cycles’ investments and some good old fashioned corporate activity as paper swaps trade one set of management for another.

Earnings expectations are now rather flighty in respect of the 2011 year, at a time when we suspect banks are still going to be impinging hard on their borrowers – amortisation is still the name of the game in lending markets. Remember, if they know you can survive, they’ll start pushing you harder.

The Fat Fund has prospered dramatically over the past year by correctly figuring that financial counters were going to be an attractively valued, high beta rocket ship leading the market. REITs may have taken a while to come round, but they have advanced with a vengeance in recent months whilst bank stocks have been stellar over virtually every time frame.

Share valuations aren’t especially expensive but neither are they cheap any longer against an environment of rising interest rates. Assumption of positive current year growth (fair enough) but stellar 2011 earnings increases – again fair enough but stellar now means 25% - are required to produce a reasoned valuation environment given the prevailing circumstances.

Large scale corrections in bull markets tend to be real rarities and many an investment manager has foundered having missed the bottom but waiting for the never to appear correction. The key, as always is valuation, which now appears to be slanting far more heavily in favour of staple type securities away from raw cyclicals. Staples additionally have the benefit of being more defensive in the event of an unusual correction. The major dampener is the world’s all round bullishness for things Australian, which is playing havoc with currency markets (especially US$ and sterling) and which is badly curtailing earnings growth for a number of our better companies (CSL, QBE).

In the past month, the Fat Fund has maintained a pretty fully invested portfolio, mainly as a result of a very active buyback program. This has seen the fund buy back 2.5% of its issued shares in the past month at an average 20% discount to pre tax NTA. That’s 50basis points of attribution, which any fund manager will tell you is the equivalent of a 1% stock bet against the index beating its benchmark by 50% over the same period. The fund manager will also tell you such securities aren’t easy to come by.

Change to management arrangements

This will be the last Fat Fund monthly report co-authored by Andrew Brown. Tidewater Asset Management Pty. Limited (“ TAM ”), currently manages the Fat Fund under a sub-contract arrangement with Fat Prophets Funds Management Australia Pty. Limited (“ FPFMA ”), which is due to expire on 22 April 2010. However, TAM and FPFMA have agreed to terminate the current arrangement on 31 October 2009.

Steve O’Hanna, who has been jointly managing the Fat Fund with Andrew Brown, will transition to FPFMA and continue his role in conjunction with Angus Geddes, the founder of “Fat Prophets” and FPFMA, who will assume a direct portfolio management role for the Fat Fund. In taking on his new responsibility Mr. Geddes will be able to draw on his close association with the management of the Fat Fund since launch. Andrew Brown is not lost to the Fat Fund, however, as he will take over as Chairman from 31 October 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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If the Fat Fund were measured on a gross basis (i.e. pre fees, tax and expenses) it would rank in the top quartile of professionally managed Australian equity funds for the past couple of years at the end of September 2009. This ranking reflects unaudited performances on a gross basis of 19.73% in the past twelve months (benchmark: 8.50%) and -5.97% per annum in the past two years (benchmark: -11.35%).

3. Top 15 Holdings at 30 September 2009

Company	Symbol	% Weighting
BHP Billiton	BHP	11.74
Westpac	WBC	10.9
National Aust. Bank	NAB	8.3
Commonwealth Bank	CBA	8.25
ANZ Bank	ANZ	6.4
QBE Insurance	QBE	4.19
Woolworths	WOW	3.28
Wesfarmers	WES	2.80
CSL	CSL	2.74
Rio Tinto	RIO	2.60
Telstra	TLS	2.05
Premier Investments	PMV	1.84
Oceana Capital	OCP	1.80
Beach Petroleum	BPT	1.78
Westfield Group	WDC	1.66

Andrew Brown[a & ] Steve O’Hanna[a ] 14 October 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