INVESTSMART GROUP LIMITED — Regulatory Filings 2009

Sep 13, 2009

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August 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 31 August 2009 was $1.0618 per share on a before tax basis, calculated in accordance with ASX Listing Rule 19:12, and represents an increase of 7.34% over the month. By comparison, the Fat Fund’s benchmark, the S&P/ASX 300 Accumulation Index firmed 6.64% 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 August 2009 was $1.0607 per share .

2. Performance Commentary

The major influences on the Fat Fund’s performance versus the benchmark during the month of August 2009 were as follows (* denotes acquired during month):

were as follows (* denotes acquired during month):	were as follows (* denotes acquired during month):	were as follows (* denotes acquired during month):
Positive Influences			Negative Influences
Company	% move	Position	Company	% move	Position
SP Telemedia 61% Overweight National Aust. Bank 17% Overweight Telstra -8% Underweight Westpac 12% Overweight QBE Insurance 17% Overweight			Beach Petroleum -5% Overweight Brambles 24% Underweight Mundo -9% Overweight Macquarie Grp. 15% Underweight Integrated Research -6% Overweight

August was categorically the month of the “financial”. Banks (+13% on an accumulation basis) despite yet more dilutive equity raisings, and REIT’s (up 17% as a sector over the month) were standout features of an exceptionally buoyant domestic equity market. What’s mystifying is that in all cases, there is no real news – just perception that the worst is over and that all will be sweetness and light from this point forward. That may be true, but in all cases, the dilutionary impact of necessary – but now arguably excessive – equity raisings has left many of these securities at far less of a valuation gap than might otherwise have pertained. The banks clearly are something of a “coiled spring” with solid underlying earnings growth from margin expansion likely to be overlaid on top of significant reductions in bad debt charges in 2011 (and probably sooner); REIT’s do not have this luxury. All have lost their lustre of cheapness.

Indeed, the market has rallied so far in companies reliant on economic turnaround that it has forsaken numerous steady growth companies who benefit from long term structural and demographic shifts, and now price them at discounts to these rust-belt exposures a couple of years out. For example, healthcare, as a grouping, traditionally the preserve of the growth investor, is starting to exhibit strong value stock characteristics, particularly examined on a 2011 basis when many of the cyclical will have recovered to a fair degree.

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 counter-argument is the level of upside postulated for operating margins, which on many measures fell to levels at or below those of the last “real” recession in Australia – 1990/1. What will be different on the upside this time are several factors:

• the level of oligopoly control of distribution (another word for retail) in many industries which will prevent manufacturers from recovering to previous levels – in many cases, distributors are becoming de-facto brand-owners;

• if China is going to recover so strongly, and with the A$ at current levels, distributors have a double benefit – and manufacturers are pushing up a very steep hill;

• the upside benefit in many traditional cyclical industries – notably media – is being scattered by changed habits and generational change;

• global change means your competitor is a state/government subsidised corporation; and

• from the last recession, Australia was deregulating- now it’s re-regulating.

The past six successive months of gains in the Fat Fund benchmark have seen a cumulative benchmark return of close to 38%. For industrial shares only, in capital terms, the uplift has been around 36%. The average bull market in Australia since 1936 has been of a three year duration, with an average uplift of about 80% in capital value. Whilst taking averages of averages is fraught with danger, it could be reasonably perceived that we are not far short of half way there with only six months gone, suggesting more moderate 10-11% per annum returns (plus dividends) to come over the next couple of years or so. These returns have to be eked out in an environment of likely sharp interest rate rises over the next two years from decade lows.

On this basis, there is clear justification for a “buy and hold” type strategy for equities in general, but the sort of paranoid FOMO (fear of missing out) which has characterised many investors stock choices in recent times – partly dictated by placements - should now be looked at as FOMU – fear of mucking up. What appears not to be perceived, from a corporate strategy viewpoint, is that the chances of the latter have heightened significantly, as global shifts weigh proportionately on local companies and markets.

In the past month, the Fat Fund has acquired new positions in Sonic Healthcare and Healthscope, further reduced its underweight position in Telstra (at this rate we’ll soon be at index…) whilst reducing its exposure to certain well-performed “micro” cap securities, and eliminating some smaller positions. We are still cautious about taking aggressive base metal and bulk resources positions, since product and share prices appear to discount a brighter environment than yet prevails; however, we are still overweight gold shares. Our own shares, at close to a 22% discount to NTA, also have appeal given the estimated 9.6% outperformance of the benchmark over the past year prior to taxes and fees, the vast bulk of which has arisen from pure security selection rather than cash/market timing .

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 August 2009

Company	Symbol	% Weighting
BHP Billiton	BHP	12.14
Westpac	WBC	10.8
National Aust. Bank	NAB	8.15
Commonwealth Bank	CBA	7.80
ANZ Bank	ANZ	5.89
QBE Insurance	QBE	4.23
Woolworths	WOW	3.33
Wesfarmers	WES	2.82
CSL	CSL	2.8
Rio Tinto	RIO	2.61
Beach Petroleum	BPT	1.99
Oceana Capital	OCP	1.95
Telstra	TLS	1.65
Westfield Group	WDC	1.54
Premier Investments	PMV	1.59

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