How to create an SMSF investment strategy (including example documents)

Trustees will want to consider their different approaches to risk and diversification. Asset allocation is an important consideration but it is not legally required to be part of an investment strategy.

The investment strategy target for someone in accumulation phase may be as simple as:

• The fund will target a return of 3% above CPI each year.

A brief description of an asset allocation strategy could follow such as:

• Equities 0–60%
  • Australian equities 0–45%
  • Global equities 0–15%
• Fixed income and cash 0–25%
• Property 0–15%

However, the ATO has also updated its guidance to include:

When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements.

The percentage or dollar allocation of the fund’s assets invested in each class of investment should support and reflect your articulated investment approach towards achieving your retirement goals. If you choose not to use allocated portions or percentages in your investment strategy, you should ensure material assets are listed in your investment strategy. You should also include the reasons why investing in those assets will achieve your retirement goals.

SMSF trust deeds also need to allow for the fund to make international investments. And if the fund is considering a limited recourse borrowing arrangement, the trust deed needs to allow for that too.

An attractive feature for some trustees of SMSFs is their ability to hold a business property but, if it is the only investment in their SMSF, their investment strategy will need to state how and why an illiquid investment meets the needs of the trustees. A single asset SMSF with a business property would not be the desired investment strategy of a retiree paying a pension, for example.

Pensions are not the only cash flow issue that SMSF trustees need to give consideration to. There will also be day-to-day expenses of the fund (such as auditor fees), tax requirements and potentially insurance premiums to pay for the fund’s trustees.

An investment strategy of a trustee entering retirement, for example, might detail how that fund was considering selling down some illiquid assets and investing them in something more liquid, such as shares, in order to prepare for ongoing pension payment requirements.

More complex issues arise when different trustees want to have different approaches to risk, such as a conservative approach for older members and a more growth-oriented approach for younger members.

For example, John and Jane are both 55 and trustees of an SMSF of which their two daughters, Sally (26) and Sandra (28), are also members. Understandably, the older couple have a more conservative approach to investments, whereas the daughters have a slightly more aggressive approach.

However, unless the assets have been segregated into accumulation and pension purposes (which would only happen upon the retirement of either or both John and Jane) the investment strategy would have to incorporate both their approaches to risk and combine that in a more balanced asset allocation of all the assets in the fund. The fund would not be able to have two separate investment strategies for accumulation funds.

What to do following a market correction

There are certain significant events that should prompt a review of an investment strategy. While these include the addition of a new member, or a member starting a pension, earlier this year the ATO also included a market correction as a significant event.

Market volatility and a market correction shouldn’t create panic, or the complete removal of assets from equities into cash, but it does warrant careful consideration of asset allocations and is a prudent time to look at the growth (equities, property, alternatives) versus defensive (cash fixed and fixed income) split in a portfolio.

Trustees may, for example, have recently found as a result of their balances falling that their growth allocation was much higher than they realised. That could be a reason to change asset allocation targets in an investment strategy slightly away from equities.

Considering insurance

A newer requirement of an SMSF investment strategy is the requirement to consider insurance. Although a simple statement that the trustees have considered it and decided it is not necessary is probably sufficient, documents supporting why this is the case will offer more legal support if the initial statement is ever questioned.

“It should be backed up with documents justifying why that’s the case,” Graeme Colley, executive manager, SMSF technical and private wealth at SuperConcepts says.

“If it’s not truly considered you may get other parties come in and say the trustees haven’t truly considered [insurance] because we ended up with all these liabilities.”

How do I create an SMSF investment strategy document?

An SMSF investment strategy needs to be a document that sufficiently covers the five things it is required to acknowledge. It can be a Word document written up by the trustees. Many SMSF platform providers have templates, as do advisers. Depending how complex your SMSF is, shorter may be better.

“You can certainly draw one up for yourself. Provided you’ve considered each of those aspects and you’ve got reasons why you’ve gone ahead as you have, there’s no reason why yours is better or worse than an adviser,” Colley says.

As the updated ATO information suggests, if you use percentage investment ranges you need to explain why you have chosen those ranges and how you plan to invest the funds in those asset classes. This would mean the inclusion of a paragraph like the following:

The trustees have agreed that at this stage of their lives a relatively high allocation to growth assets such as equities will help maximise their superannuation in order to achieve a beneficial retirement outcome. Within the allocation to Australian equities, the fund will also seek a significant portion of quality companies that prioritise dividends in order to maximise the fund’s income as well as capital gains.

What do I do with the investment strategy?

The investment strategy is as important as the SMSF’s trust deed. Both documents are audited annually. But the first thing you need to do is act on it. It’s not enough for a strategy document to say it will be able to pay a pension when it’s due when the fund is invested in illiquid assets and is unable to access any cash flow.

“That is considered not to be consistent with the investment strategy,” Colley says.

An investment strategy also forms part of the SMSF’s annual review and audit. An SMSF auditor might suggest, for example, that an investment strategy be more specific as it relates to a complex investment product, such as crypto currency or futures, if a fund is investing in those assets. An SMSF is only allowed to invest in such assets if the trustee can justify the reason for these investments.

In such a case, an investment strategy document could attach a derivative risk statement, outlining the trustee’s expertise in the area, and how it would be of benefit to the fund.

You need to review the investment strategy at least annually, according to the Australian Taxation Office, and it is also a good idea to review around life-changing or significant events.

Any reviews need to be documented in a minute, which details how the trustees have considered the investment strategy and propose no change, or detailing changes if they have been proposed.

Two model SMSF investment strategy documents

An SMSF investment strategy needs to be a document that sufficiently covers the specific factors as specified by the ATO and detailed in our article here. It can be a Word document written in relatively simple language by the trustees.

You can use a template provided by a financial adviser or SMSF platform provider or use our examples below as a guide.