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 the law does not define how often “regularly” means, it is commonly accepted—and expected by the ATO—that a review should occur at least annually.
Some trustees review their strategy leading up to, or at the beginning of, a new financial year. Others do it while reviewing the completed financial accounts from the previous year. Neither option is right or wrong; the important point is choosing what works for your fund.
Either way, you will need to show your fund’s auditor that the strategy has been reviewed and that any decision—whether to make changes or keep the existing strategy—has been documented.
When else should you review?
There may be other times when it is appropriate to review the investment strategy, including when:
- There is a market correction
- A member joins or leaves the fund
- A member starts a pension in the fund
What an investment policy should cover
An investment policy will generally have two parts:
- Investment objective. This outlines the fund’s objectives and expected outcomes. For example, an objective may be to achieve a certain level of return over a set period, taking into account the members’ ages, retirement needs and investment risk profiles.
- Investment strategy. This outlines how the fund will achieve those objectives. It may include investment asset ranges or specific assets that will be held.
Key considerations
When reviewing your fund’s investment strategy, consideration must be given to:
- The risk of holding particular investments and their returns, in light of the fund’s objectives and expected cash-flow requirements
- The composition of investments and the risk of inadequate diversification
- The liquidity of investments, in light of expected cash-flow requirements
- The ability to discharge existing and prospective liabilities
- 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 apply to the circumstances of the fund.
Diversification and insurance
You must consider diversification, but that does not mean every fund must have a diversified investment strategy. Many funds hold only a property and a bank account, and this may be appropriate. The trustees should still document how they considered diversification, why a concentrated approach is appropriate and why they chose those particular assets.
Likewise, there is no legal requirement to hold insurance cover for members, but you do need to document that it has been considered.
The shift from growth to drawdown
A member starting a pension may be a reason to review the fund’s investment strategy because it is likely to change the fund’s liquidity needs and investment profile. When all members are in the pre-retirement growth phase, expenses are usually more predictable and many funds do not need to hold large cash reserves. Once members begin accessing benefits as pension or lump-sum payments—or both—cash flow, liquidity and a potential cash buffer become more important.
It is not uncommon for trustees approaching the end of a financial year to discover that they do not have the cash to satisfy even the minimum pension requirements. While there may be several reasons for this, it should prompt questions about the appropriateness of the current strategy and whether the fund’s asset holdings need review.
A strategy centred on one property and one bank account may have been reasonable during the growth phase, but does it remain suitable during the drawdown phase?
Although many Australians are comfortable with property, that does not make it appropriate in every circumstance. If rental income cannot support your retirement needs and minimum pension withdrawals, something needs to change. The same applies to other assets that may not be easy to sell, such as holdings in unlisted companies and trusts.
Reviewing your fund’s investment strategy should not be treated as a tick-a-box legal requirement. You have worked hard to build your retirement wealth; when the time comes, you want to be able to enjoy it. An appropriate investment strategy is an important part of running an SMSF.
Have you reviewed your strategy lately?
