Reviewing your fund’s investment strategy
Superannuation law requires trustees of SMSFs to formulate, regularly review and give effect to an investment strategy that has regard to the whole of the circumstances of the fund. Although there is nothing in the law stating a timeframe that may define ‘review regularly’, it is commonly accepted that this would be at least annually. This aligns with comments on the ATO’s website where they expect reviews to occur at least annually.
Some trustees will undertake an annual review leading up to, or at the beginning of a new financial year, while others will undertake the review as part of reviewing the completed financial accounts from the previous financial year. Neither is the right or wrong option, and you must consider what is best for your situation.
Either way, you will need to be able to show your fund’s auditor that you have reviewed the investment strategy and documented any decisions made, whether it be recording changes deemed necessary or determined the existing strategy remains appropriate.
There may be other times that it is appropriate to review the investment strategy. These may include when:
- There is a market correction;
- A member joins or leaves the fund;
- A member starts a pension in the fund.
An investment policy will generally be comprised of two parts:
- Investment objective – this part outlines the fund’s objectives and expected outcomes. For example, an objective may be to achieve a certain level of return over a certain period. This would generally take into account the age of the members, their retirement needs and investment risk profile.
- Investment strategy – this part outlines how the fund will achieve the stated objectives. For example, it may include investment asset ranges or specific assets that will be held.
When reviewing your fund’s investment strategy, consideration must be given to:
- The risk of holding particular investments and their returns, with regards to the fund’s objectives and expected cashflow requirements;
- Composition of investments and the risk of inadequate diversification;
- Liquidity of investments, with regards to expected cashflow requirements;
- Ability to discharge existing and prospective liabilities; and
- Whether insurance cover for one or more members should be held by the fund.
Although these points need to be considered, it is up to the trustees to determine how they are applied, based on the circumstances of the fund.
As an example, you must consider the diversification of the fund’s assets, but that does not mean you are required to have a diversified investment strategy. Many funds hold just a property and a bank account, and this may be appropriate for those funds. However, the trustees should document what consideration they gave to diversification, why the lack of diversification is appropriate and why they have chosen these particular assets.
Likewise, there is no legal requirement to hold insurance cover for the members, but you do need to document that it has been considered.
As noted above, a member starting a pension may be reason to review the fund’s investment strategy. This is due to the fact that this is likely to change the liquidity considerations and investment profile of the fund. When members are all in the pre-retirement growth phase, expenses are usually more predictable and there isn’t a need for many funds to hold large cash reserves. Once members reach the point they are accessing their benefits, as either pension or lump sum payments (or both), cashflow, liquidity and a potential cash buffer become a more important consideration.
It is not uncommon that leading up to the end of any given financial year we will field enquiries and concerns from trustees that do not have the cash to satisfy even the minimum pension requirements for the year. While there may be several reasons for this, it should raise questions about the appropriateness of the fund’s current investment strategy and considerations as to whether a review of the asset holdings is warranted.
If we revisit the one property and one bank account funds mentioned early, this may have been a reasonable strategy during the growth phase, but does it remain so during the drawdown phase?
Although many people are comfortable with property and Australian investors in general have an affinity for the old bricks and mortar, this does not mean it is an appropriate investment in all circumstances. If the rental income from the property cannot support your retirement needs and minimum pension withdrawal requirements, something needs to change. This will hold true for any other investment that may not be easily sold, such as holdings in unlisted companies and trusts.
Reviewing your fund’s investment strategy and giving consideration to the needs of the members and the asset holdings of the fund should not be seen as just a tick-a-box legal requirement. You’ve worked hard to build you retirement wealth and when the time comes, you want to be able to enjoy it. Having an appropriate investment strategy that will allow this is an important element of running an SMSF. Have you reviewed your strategy lately?
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