Refreshing your SMSF investment strategy

In a 2018 report, the Australian Securities and Investments Commission (ASIC) found that, in a survey of over 450 SMSF members, almost a third did not realise that their fund was required to have an investment strategy. What’s more, 28% of those surveyed admitted to giving no consideration to members’ insurance needs through the fund.

In this month’s blog we’ll look at the investment strategy issues attracting the attention of the regulators.

Single asset funds

In late 2019, the ATO commenced a review of all SMSFs that have more than 90 per cent of their investments in a single asset or class of assets. The ATO expects to write to over 17,700 SMSFs that are in this situation.

It is important to note that such concentration of investments does not, of itself, contravene any obligation trustees have under superannuation law. That said, the fund’s investment strategy must reflect this situation, must identify the risks the fund is exposed to as a result of a lack of diversification, and must outline steps the fund is taking to mitigate these risks.

Particular problems can arise where an SMSF has a property as the fund’s sole asset. It is hard to identify strategies to protect against such lack of diversification and the property’s cash flow will need to be sufficient to meet all the fund’s needs. These issues are exacerbated when the property is geared and loan repayments are added to the fund’s liabilities.

Reviewing the investment strategy

The trustees of every SMSF should review their investment strategy document at regular intervals – annually should be considered a minimum. That said, there are a wide range of events that should trigger an automatic review of the strategy on top of these regular reviews, including:

• The death or exit of a member,
• The addition of a member,
• The marriage or separation of a member,
• A major alteration to a member’s assets or liabilities,
• The shift of a member from accumulation phase to retirement phase (or vice versa), and
• A significant change in the assets of the fund.

The requirement that every SMSF’s investment strategy consider the insurance needs of each member has added a number of situations to the list of those that demand a review of the strategy. Each client’s insurance needs will be dictated by a number of factors, some of which would seem to be otherwise irrelevant to the operations of their SMSF – such as the member’s liabilities outside of super.

Effecting the investment strategy

Trustees and their advisers need to regularly ask one simple question about their fund – is the fund doing what it says it will in the investment strategy?

There are a wide range of reasons why SMSF trustees and their advisers may find that their fund is not, in fact, doing what its investment strategy requires. A common issue will be that the strategy has not been reviewed for some time and, consequently, the fund’s members’ situations have changed. Others may include that market movements have caused the assets to no longer sit within the asset allocation ranges or that a new type or structure of investment is available that the strategy did not originally consider.

Getting your ducks in a row

Now is the time for SMSF trustees and their advisers to ensure their investment strategy is well-documented, up to date, and reflective of the investments held by the fund. The regulators have shown that the age of broad or vague investment strategies has come to an end, and they are looking to these documents as a way to govern sound investment practices.

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