If you’ve made the decision to set up your own self-managed super fund, you no doubt understand the importance of having the right investment strategy and approach in place.
We take a look at what’s involved and what you need to consider.
Developing an investment strategy for your self managed super fund
Your investment strategy must outline the investment objectives and types of investments your self managed super fund (SMSF) can make.
Having a sound investment strategy is not only a sensible thing to do, it is a legal obligation of SMSF trustees.
While the law doesn’t define exactly what the investment strategy needs to look like, or what it must contain, it does provide some guidance on what to consider, which may include:
- Diversification of the SMSF - which means investing in a range of assets and asset classes
- The liquidity of the SMSF’s assets
- The SMSF’s ability to pay benefits
- The members’ needs and circumstances, such as their age and risk tolerance.1
With no prescriptive formula, there are many different approaches to the investment strategy trustees could take. It’s important to think about a target that you are trying to achieve with your SMSF’s investment. For example, CPI + x% return (you insert the “x”) over a 5 year period. This takes into account the fact that investments and markets can and do fluctuate over time.
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Does your self managed super fund have liquid assets?
It is important to consider the liquidity of your SMSF’s assets, or how easily they can be converted to cash - and its ability to pay benefits when members retire, or to cover other expenses that may arise.
As part of the formulation and regular review of your investment strategy, as the trustee, you also need to consider whether it is appropriate for insurance, such as life insurance, to be held within the fund for each of the members.
Setting a target asset allocation range in your self managed super fund
Many investment strategies also nominate a targeted asset allocation by asset class, as well as risk tolerances. As an example, a target of 40% invested in Australian shares, and a tolerance of +/- 20% performance.
This simply means the trustee sets a target range for what they would like to achieve in terms of performance, without adjusting the investments unless it falls outside of this range. In the above example, if the value of Australian shares across the SMSF’s portfolio stayed within 20% - 60% there would be no change required.
Where some SMSFs get it wrong is to set a target, but allowing the tolerance to be too broad (between 0% and 100%). This usually isn’t a sound investment strategy as there is no real goal that the investment strategy can be measured against.
Consider the level of diversification in your self managed super fund
As a trustee, you need to turn your mind towards the question of diversification of the underlying assets. Put another way, you need to consider the risks of having all your eggs in one basket, and how having a range of investments may reduce the impact of a market fall in one asset (or asset class). Whilst there isn’t anything to prevent you having a large allocation to one asset (or asset class), the reasons for doing so should be documented.
When to update your self managed investment strategy
An investment strategy should be reviewed regularly. The big question is how often should it actually change? Remembering that you need an investment strategy for your SMSF both in accumulation and retirement phase, moving from accumulation to retirement may be an example of an event that requires an in depth review of your strategy.
However, provided your investment strategy is in line with the legal requirements, such as diversification and liquidity, it doesn’t need to change frequently (but should still be reviewed regularly).
Importantly though, this doesn’t mean that you can’t change the underlying investments more often. Considering that an investment strategy is usually set at an asset class level (e.g. Australian shares), there is plenty of scope to make changes within that asset class itself. But remember that there are a number of considerations to take into account when making these changes.
Capital gains implications of self managed super funds
When you make changes to your investment strategy, remember that any changes to the underlying investments (to allow you to align to the broader strategy) could have capital gains tax implications. The fact that a capital gain (or loss) may arise should not necessarily impact the decisions you take around your investment strategy approach – you just need to be aware of the impacts from selling investments.
Investing in property through your self managed super fund
Another item often overlooked is when trustees choose to purchase property through their SMSF. Due to the level of investment required, this will often be a large percentage of the SMSF’s value, and this can impact an existing strategy with a low allocation to property.
While you can change your investment strategy at any time to account for a change in allocation, it’s important to ensure that you have considered and documented why this remains appropriate for your SMSF, taking into account the reduced diversification and liquidity impacts on the portfolio.
Need some assistance?
While having a carefully considered and documented investment strategy is vital for any SMSF, it’s important to remember that as a trustee, you don’t have to do it all yourself. There are professional advisers that specialise in SMSFs that can help develop an appropriate strategy for the fund and its members, and assist the trustees in meeting their obligations.
1. Commonwealth Consolidated Regulations, Superannuation Industry (Supervision) Regulations 1994 - REG 4.09, http://classic.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s4.09.html
Information current as at 7 February 2019. This article is produced by BT Financial Advice (“BTFA”). BTFA is a division of the Westpac Banking Corporation ABN 33 007 457 141 AFSL & ACL 233714.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.