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Formulating an Investment Strategy

Every self-managed super fund (SMSF) must have an investment strategy. Not only is this required by the superannuation laws, but it’s also an important part of running an effective retirement fund. In this article, we look at the various requirements which apply to SMSF investment strategies.

 

What is an Investment Strategy?

In simple terms, an SMSF investment strategy is just a plan for how you intend to make and manage investments in your fund in order to meet the retirement goals of your members.

 

What are the requirements?

Under Australian superannuation law, every SMSF must formulate and keep a written investment strategy which covers a range of aspects.  This includes:

  1.  The nature/needs of members (e.g. their age, income, assets and retirement needs) to ensure the strategy fits with their circumstances and objectives;
  2. The expected risks and returns from investments covered by the strategy;
  3. The level of diversification within the fund (i.e. whether members are unduly exposed to potential losses because of an over-exposure to certain assets/classes),
  4. The liquidity of investments, to help ensure your SMSF can meet its expected cash flow obligations;
  5. The ability of your fund to pay benefits to members when they retire and meet ongoing expenses;
  6. Whether the fund should take out insurance for its members; and
  7. Any other relevant factors (including, for example, whether the proposed investments can be reliably valued).

 

Other considerations:

Your investment strategy should be a formally documented, written document. If nothing else, this will make it easier to demonstrate to your fund’s auditor (and if required, the ATO) that you have considered all relevant matters.

An investment strategy does not need to detail the specific individual investments that the fund intends to make. That sort of granular detail might be set out in your fund’s financial plan, but it isn’t technically required when formulating your investment strategy. Your investment strategy also need not specify a precise percentage that you intend to make to each investment/asset class. 

 

Don’t just file it away

Once you have formulated an appropriate investment strategy for your SMSF, you need to make sure all the fund’s investments are made in line with that strategy. The strategy cannot just be a “lip service” document. You are also required to review your investment strategy on a regular basis to ensure it remains relevant and appropriate for your members.

You should also review your investment strategy at least annually and also whenever the personal circumstance of any fund members change (e.g. a new member joins or leaves) or there is a material change in the funds situation (e.g. a major asset is acquired, a loan is taken out or there has been a death or disablement of a member).  This does not mean you shouldn’t monitor each individual investment more frequently. You may wish to look at your investment positions more frequently. The review of the investment strategy will just look at your SMSF’s overall asset allocations and approach (e.g. whether there is a need to reduce overall exposure to higher risk, growth assets such as shares or change the fund’s investment approach to accommodate a change from a member entering retirement).

 

Where to next?

If you are using a SMSF administrative service to establish your SMSF, they will usually issue with a sample or template which can help guide you in establishing your own investment strategy document.  These can be great starting points, but naturally need to be tailored to take into account your own circumstances and objectives. 

To help you get started, we recommend you visit the ATO's website for more information. You can also read our blog article [here](link) for some additional tips.  As always, you should seek professional advice from your accountant or financial/tax adviser if you are in any doubt about these matters.

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