SMSF Investment Strategy | SMSF Engine (2024)

1. What Is An SMSF Investment Strategy?

An SMSF investment strategy is your plan for selecting, acquiring, and holding assets within your self-managed superannuation fund.

The first element of the SMSF’s investment strategy is to determine the investment objective – what are we trying to achieve? Is it capital growth, income to support pension payments, preservation of capital, or a mixture?

That objective, coupled with consideration of the risk and characteristic profiles of the members (which might include elements such as age, employment status, and retirement needs), then determines how best to achieve the objective.

This leads to a high-level allocation across various asset classes. The actual selection of the specific assets, e.g., BHP shares, is outside the scope of the strategy. However, the end result must be consistent with the stated strategy.

2. Who Needs A Self-Managed Super Fund Investment Strategy?

According to the Australian Taxation Office and superannuation law, all SMSFs are obliged to

• Prepare
• Implement
• Give effect to, and
• Regularly review the fund’s investment strategy.

3. What Must Be Included In An SMSF Investment Strategy?

The strategy must be in writing and must give appropriate consideration to

• Risks involved with each investment
• Likely returns
• Composition of the portfolio, including diversity across assets and asset classes
• Liquidity – i.e., how easily you can convert SMSF investments to cash. The fund needs sufficient liquidity to
  • Meet current liabilities such as income tax and other expenses
  • Pay benefits on retirement (regular pension payments and lump sums)
• The need for insurance cover for each member

The strategy must explain how the asset allocations will meet the investment objectives of the fund.

4. Why Does An SMSF Need An Investment Strategy?

Aside from the legal requirement to have one, an investment strategy sets out the “how” of the SMSF’s primary purpose: to provide retirement benefits to members or their dependents or legal representatives after their death.

The objective is the driving factor. It gives direction to all investment decisions made by trustees, first regarding each asset class they will invest in and then the specific investments they make.

Each fund’s investment objectives will be different. The ATO is clear that they are not looking for a document that matches the words of the legislation. They want something that is tailored for the circ*mstances of each SMSF.

And this is primarily determined by the personal circ*mstances and personal objectives of the fund’s members.

The trustee must ensure that the investment objective is suitable/matches the requirements of the members.

To give a practical example:

Once trustees get to the point of implementing their strategy – i.e., investing in a specific asset and managing it – they must be careful to comply with SMSF legislation and regulations. This would include, for example, the rule that funds cannot provide pre-retirement benefits to members or their associates.

5. When To Review And Update Your SMSF Investment Strategy?

It’s not enough to simply have an investment strategy. It must also be implemented, reviewed regularly, and updated where relevant circ*mstances have changed.

Trustees must review the strategy at least annually, and whenever there is a significant change in circ*mstances, such as

• A market correction
• A new member joining the fund
• A member changing to the retirement phase

Auditors will be looking for evidence that the SMSF reviews its strategy regularly.

This evidence might include a limited statement in the financials that trustees have reviewed the strategy and it remains appropriate. The ATO suggests that notations on the current strategy or minutes of trustee meetings would be evidence of review. For example, a separate minute might be required to update the asset allocations if the actuals are outside the original strategy ranges.

If the strategy is no longer current or too old (3 – 5 years is acceptable), the auditors may require an updated strategy. Failure to provide one can lead to a qualified audit.

6. What Assets Can Be Included In A Self-Managed Super Fund Investment Strategy?

Perhaps we should start by asking where self-managed super funds cannot invest.

Where Can An SMSF Not Invest?

There are very few limitations on the types of assets that super funds can invest in, with the following provisos:

• Your trust deed permits it
• You comply with superannuation legislation
• You meet the requirements of the sole purpose test

The details of these rules are relatively complex. It is advisable to seek professional advice to ensure that you do not risk members’ financial future.

Investment Options

Trustees can have the fund’s assets invested in some or all of the following:

• Direct equities
• Derivatives (which may require specialist documentation such as a derivative risk statement)
• Property trusts
• Managed investments
• Direct residential, industrial and commercial property
• Deposits and investments with banks and other financial institution securities
• Any other asset that the trustees believe will achieve the objective of the fund, e.g., collectables, personal use assets, and cryptocurrencies

Depending on the investment objective and specific considerations of the members and the fund, trustees will decide on a percentage or dollar allocation of the fund’s assets to be invested in each asset class.

7. What Does Having Regard For Diversification Mean?

The Australian Tax Office has a helpful video that explains what is required from a self-managed super fund investment strategy. You can find it on our resources page.

It talks about an SMSF not having all their eggs in one basket. Having a diversified portfolio rather than just one asset class spreads the risk.

Some of the risk involved includes

• Return
• Volatility
• Liquidity

For example:

There is a risk of insufficient liquidity if all or most of your fund’s investments are in fixed property. It is even riskier if you have used a limited recourse borrowing arrangement to acquire the asset. If the property loses value, this reduces the value of the members’ retirement savings and could even lead to a forced sale.

It is recommended that trustees consult with an SMSF accountant or financial adviser who has an Australian Financial Services (AFS) licence to give financial advice on specific asset investments.
However, trustees are ultimately responsible for their investment decisions