As first appeared in Switzer Daily, Monday 6 November 2017.
If you have a self-managed super fund (SMSF), then you should be aware one of the obligations that is placed on you as a trustee is that you must have an investment strategy for the fund that is reviewed regularly. But what makes a good investment strategy? How long does it need to be? How detailed?
These are all great questions, but unfortunately there is no single right answer. However, here are 5 considerations that can help you along the way.
Super law does require that when formulating an investment strategy, trustees must have regard to diversification. Diversification relates to a consideration about the spread of different investments you might have – or thinking about ensuring you don’t end up with all your eggs in one basket. However, there isn’t a requirement that an SMSF’s investments must be diversified, and there are some SMSFs that have large investments in a single asset (or asset class). Most commonly this occurs where the SMSF has a direct property investment, with a comparatively smaller investment in cash in order to make any relevant payments as necessary.
The big risk being so concentrated with your investments into one asset or one segment of the market is what if something went wrong? What if a property bubble bursts?
2. Risk and return
The risk involved with, and the likely return from, the investments are also important considerations, and really ties back into the issue of diversification of investment.
What can sound like an exciting possible return on any particular investment, should always be balanced against a consideration of any risks involved with that investment. The difficulty is that both risk and return are assessments of what may happen in the future. It’s important to remember that any historical performance data availably is purely that – it’s history! It can provide some guidance as to how well a portfolio manager has looked after the monies under their control, thereby providing some insight into their level of governance, but you should always be cautious when it comes to relying on performance history.
You shouldn’t look at any investment in isolation, and always compare their performance against peers and over multiple periods of time. For example, whilst a share fund that provided an 8% return in the last 12 months might sound relatively good, it’s not if all other comparable share funds were returning in excess of 10%.
In addition to pure investment risk, you need to consider how much risk the members of the SMSF are willing to take on. The answer may be different for each member of the fund, so you also need to think about whether each member has their own investment portfolio in the fund, or whether everything is pooled together.
As a trustee, you need to ensure that your SMSF is able to pay its liabilities as and when they fall due. Doing this for the ongoing running costs of your fund, sounds relatively easy. But you can’t forget about the additional liquidity required as members of the fund approach retirement and start to draw on a pension from the fund.
Trustees are also required to consider the insurance needs of members. This doesn’t mean that the fund has to hold insurance for the members, but this is actually an important consideration. Given that the trustees of an SMSF are also the members, this is about considering whether you have enough insurance of your own, and if not, should you acquire more coverage through your super. But don’t constrain yourself to personal insurance considerations, even though that’s all that’s technically required. Depending on the type of investments in your SMSF, you should also consider if you need the fund to take out other types of insurance. This could be a vitally important consideration if you hold property.
5. Documenting it all
Ensure you document your plans. The actual investment strategy document can be long or short, but you need to show you have considered the above elements. Most good investment strategies will have two key positions within them.
1. An overall goal that the investments of the fund are trying to deliver. For example, the fund could be targeting an overall return 2% above Consumer Price Index on a 5 year rolling basis.
2. Second, its sets out acceptable investment parameters. For example, it may say the fund is happy to hold between 30% and 60% of its investments in Australian shares, but is targeting a holding of 45%.
These elements taken together give the trustees something to measure performance against. If the SMSF isn’t meeting these objectives, or its investments fall outside of the expressed permitted range, then the trustees need to be doing something to bring it back in line.
Overall, a good investment strategy is one that aligns to the future goals of the members and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals.
The good news is that as a trustee of a SMSF, you don’t have to do it all yourself. Professional support can help you understand how your fund has performed in the past and is currently performing, and also help you to identify the requirements of members and select investment to give them a chance of future success.
Bryan Ashenden is Head of Financial Literacy and Advocacy at BT Financial Group
Things you should know.
The information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. Any taxation consideration outlined in this presentation are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. The tax implications of the relevant products mentioned in this presentation can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.
BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS) operates Panorama Investments and administers Panorama Super. BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) is the trustee and issuer of Panorama Super, which is part of Retirement Wrap ABN 39 827 542 991. Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 (WFSL) is the responsible entity and issuer of interests in BT Managed Portfolios. Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714 (Westpac) is the issuer of the BT Cash Management Account (BT CMA). Together, these products are referred to as the Panorama products. A Product Disclosure Statement or other disclosure document (PDS) for the Panorama products can be obtained by contacting BT on 1300 881 716, or by visiting bt.com.au. You should obtain and consider the relevant PDS before deciding whether to acquire, continue to hold or dispose of interests in the Panorama products.
In addition, BTPS is the provider of the SMSF Establishment Service and the SMSF Administration Service. A Guide and Terms and Conditions is available for each of these services by contacting BTPS on 1300 881 716.
BTPS, BTFM and WSFL are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 (Westpac). Apart from any interest investors may have in Westpac term deposits, Westpac securities or the BT CMA acquired through the Panorama products, an investment in, or acquired using the Panorama products, is not an investment in, deposit with or any other liability of Westpac or any other company in the Westpac Group. These investments are subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. Westpac and its related entities do not stand behind or otherwise guarantee the capital value or investment performance of any investments in, or acquired through, the Panorama products.
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© BT Financial Group – A Division of Westpac Banking Corporation. Information current as at 06/11/2017.