Trustees often ask for an SMSF investment strategy example that is practical and can be used as a guide to setting up a new strategy or reviewing and updating an old one.
In response, SMSF Engine has designed an investment strategy preparer for trustees. We have used it to give you an SMSF investment strategy example. We also offer an investment strategy template as an additional resource.
This article will use content from these resources to take trustees through the steps, options, and decision-making processes required to set up an investment strategy.
A quick disclaimer:
The template should be tailored to take account of members’ personal circumstances. The examples are for illustration only and should not be construed as legal, financial, or tax advice. Please seek professional advice from a licensed financial adviser for your SMSF’s asset allocations and product selections.
The sole purpose of every SMSF is to provide retirement benefits to members or their dependents or legal representatives after their death. There is also a requirement for trustees to act in members’ best financial interests.
The investment strategy sets out how trustees will achieve this.
Investment strategy requirements are relatively straightforward:
The ATO has not prescribed the format for the investment strategy.
However, it must include certain elements:
We have used the investment strategy preparer to provide an SMSF investment strategy example.
It sets out the required information in the following order:
The first five items are relatively easy to complete but provide the context for the investment objectives and allocations to meet each members’ personal and financial situation.
This section is simply the fund’s name, an individual or corporate trustee, and the members’ names, dates of birth, and contact details.
In our example, the fund is “Could Love a Fund”, and there are four trustees, with dates of birth ranging from 1995 to 1998. So, in this fund, members are in their twenties – a long way from retirement age.
The fund in our example has a long time horizon. Trustees are pretty close in age, all in the accumulation phase, and due to retire only from 2060. Therefore this fund can make a very general comment, just recognising that the strategy might change in the future.
A very different comment would be required if members were approaching retirement age, or if some were in accumulation and others in pension phase and yet others had both accumulation and pension accounts.
The need for life insurance, death, disability, and income protection should be considered for each member.
This was the finding in our example:
|Trustee #||Life (death) insurance||Disability||Income protection|
|#1 Brent||Adequate within the fund||Adequate within the fund||Adequate outside the fund|
|#2 Mark||Adequate within the fund||No need||Adequate outside the fund|
|#3 Clayton||No need||No need||Currently seeking this insurance, but not finalised at the time of completing the investment strategy|
|#4 Greg||Adequate within the fund||The trustee recommends that the member seeks advice||Member declines|
The SMSF auditor will monitor whether the action was taken as indicated for Trustees #3 and #4. The auditor will generally want to see a renewal notice to confirm that the cover is held in the fund’s name and that the member is the life insured.
There can be tax benefits if the fund purchases insurance for members. However, a member wanting to replace the current cover held outside the fund may have to pass a medical examination, have restrictions, pay higher premiums for the new cover, or even be unable to obtain insurance at all.
You might provide the reasons for a trustee not needing insurance cover. For example, members might have significant assets inside and outside superannuation and no significant existing and prospective liabilities. Or perhaps members are at an age or have pre-existing medical conditions that preclude them from having insurance on a cost-effective basis.
Trustees must show that they considered the cash flow needed to cover current liabilities, including tax and ongoing costs, and retirement benefits such as pension payments and lump sums.
They must consider anticipated annual inflows and outflows.
In our example, annual cash inflows of $35,000 would come from the following sources:
Outflows will be linked to the previous information about member ages, retirement status, and insurance needs. They will also depend on how much investment or tax advice and administrative assistance SMSF trustees have elected to use. There might be specific costs associated with setting up or winding down a fund or investing.
Anticipated outflows in our example totalled $25,000.
If, as in this case, inflows exceed outflows, you could add a comment that “Cash in excess of anticipated liquidity requirement will be invested in accordance with the Fund’s investment strategy.”
The investment objectives are the crux of the investment strategy.
Based on the members’ profile and their personal goals, trustees can decide on a primary objective.
In general, the objective will be one or more of the following:
In our example, the trustees were looking for a combination of income and capital growth.
Primary investment objectives give direction to all investment decisions made by trustees. They drive decisions about diversification across asset classes, the percentage or dollar allocation to each asset class, and specific product choices.
One of the investment strategy requirements is that trustees consider the risk involved in every decision about where to have the fund’s assets invested.
There may be risks related to member profiles – for example, age, medical status, or whether they have assets outside of the self-managed super fund. There may be specific risks for collectibles or other non-standard assets (e.g., cryptocurrencies), particularly where they comprise a material portion of the portfolio.
The ATO is concerned when trustees put all their eggs in one basket in just one asset class, especially property. However, it may be appropriate not to have a mix of investments – depending on the investment objectives and the characteristics of the members.
So, for example, trustees may decide on a 70:30 split of growth investments (equities, properties) vs. income (cash and fixed income). The 70% in growth assets might go to purchasing a specific property, using a limited recourse borrowing arrangement to fund it. This could be risky because of its illiquidity, but might be justified if trustees believe it provides the greatest scope for growth over the next 5 to 10 years.
Trustees may want to add a clause from our template, acknowledging this risk:
“The Trustees have indicated they understand and are prepared to accept the increased volatility of returns associated with borrowing to invest, including the risk of a total loss of invested assets where such assets are subject to limited recourse borrowing arrangements.”
In our Could Love a Fund example,
Their allocation shows a 50:50 split between income (cash and interest) and growth (property and shares).
|Asset class||Low %||High %||Target %|
|Cash Products including term deposits||5||30||15|
|Direct Australian Property (Commercial)||0||15||15|
|Listed Australian Shares/Securities||20||50||25|
|Listed International Shares||5||50||10|
The wide range between 5% and 50% for fixed interest in this example is not optimal. In practice, we would prefer to see a tighter range – e.g., 30% to 40%.
SMSF trustees want an investment strategy that meets the rules, gives direction and is flexible.
However, your SMSF auditor has to judge whether you have met the conditions of your investment strategy every year.
So, if you are too specific (for example, with your percentage investment ranges or the dollar allocation per asset class), this may give you direction; but if actuals are too far outside the original strategy ranges, the auditor may suggest you review the strategy and the ranges. Much will depend on market performance. For example, if the equity portfolio is pushed above the upper range by strong market performance, the auditor is likely to allow some leeway.
On the other hand, if everything is too vague, you may have a tick-box compliance document that is of little use to you.
One way to have a trade-off between flexibility and direction is to have a reasonably broad statement regarding the fund’s investments and a policy to have a detailed asset allocation exercise once or twice each year or following certain significant events.
Our template suggests a clause in the investment strategy document about such policies.
“The policies adopted by the Trustees to achieve these objectives are:
The Trustees will aim to follow the investment strategy. However, they will at all times reserve the right to change the investment mix, depending on the market situation and opportunities available, to better meet the objectives of the fund.”
One of SMSF trustees’ most critical tasks is developing, implementing, regularly reviewing, and updating the SMSF investment strategy. This is their tool to achieve the sole purpose of the SMSF – to provide retirement benefits to members – and to ensure that they act in their members’ best financial interests.
SMSF Engine offers three resources to assist trustees with this task:
An SMSF investment strategy example
To help trustees navigate the process and understand the principles that underpin their decisions along the way.
An SMSF investment strategy template
To give additional ideas to assist decision-making and customise strategies.
An interactive SMSF Investment Strategy Preparer
A framework for trustees, SMSF accountants, and financial advisers to work through the essential investment strategy requirements.
by Alex Polorotoff
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