How do I devise my SMSF investment strategy?
An SMSF’s investment strategy is the backbone of the fund. Without one, the trustees won’t know what to invest in and the fund will have no way of meeting its investment goal.
A self-managed super fund’s (SMSF’s) investment strategy is the backbone of the fund. Without one, the trustees won’t know what to invest in and the fund will have no way of meeting its investment goal. In fact, it’s a statutory requirement for every fund to have a written investment strategy.
While every fund’s investment strategy will be different, they all have a common structure and consider common factors.
Above all, the investment strategy must be designed to help the fund member’s meet their retirement goal. So if the goal is for the fund to accrue $2 million in assets before the members reach retirement, then the investment strategy must be set out to achieve that goal.
The Australian Taxation Office (ATO) has published very clear guidelines about what an SMSF investment strategy needs to cover.
First, it must outline the fund’s objectives. An example of an objective might be for the fund to achieve a return in line with the All Ordinaries index. Another example of an objective might be for the fund to achieve a return in line with the annual percentage change in domestic GDP. Every fund’s objective will be different, and will reflect the unique circumstances of the fund’s members.
Importantly, the investment strategy must make careful consideration of the fund members’ own circumstances. It must take into account the age and time to retirement of members, their existing assets inside and outside super, members’ current and future salary and ability to contribute to the fund and the risk profile of members. It must also factor in liquidity – that is, the ability of the assets in the fund to be sold within a certain timeframe.
The diversification of the fund is also critical. While the ATO does not stipulate how diversified the fund’s assets must be, regulators do want to see that the trustees have considered this issue.
Taking into account the risk profile of the fund’s members, the strategy will also determine what the fund invests in. It is possible that different members will have a different risk profile. In some cases where the risk profile of members is different, individual asset pools will need to be created that reflect individual members’ risk preferences. Drawing on the risk profile and other attributes of members, it will set out the portion of the fund, generally within a percentage band, that can be invested in various asset classes, including shares, property, fixed interest and cash.
It’s really important to ensure that the strategy is reviewed regularly and there is an expectation from regulators that this will be at least once a year. The strategy should also be reviewed at important life events, for example when a member retires, suffers an illness, goes through a divorce, or when a member dies. These events can all have a material effect on how the fund operates. For instance, risk tolerance may drop if a member dies, and asset allocation may need to change so that the fund holds fewer high-risk assets.
If the fund is ever audited, regulators will want to see that the trustees have considered the insurance needs of members, and have documented this. However, there is no requirement for the fund to actually hold insurance, especially if members can effectively self-insure.
There is no one size fits all approach when it comes to determining an SMSF’s investment strategy – after all, an SMSF’s main purpose is for members to run it the way they see fit.
But it is essential for the strategy to consider the elements outlined above to ensure the fund complies with regulations and meets members’ income needs in retirement.