Investment Strategy formulation, documentation and implementation are amongst the most important tasks for trustees of self-managed super funds (SMSF). An investment strategy is mandated to be documented for all SMSFs. …and it is required to be drafted in compliance with the legislation under which the SMSF is operating. This document is covenanted on trustees under section 52 of the SIS Act – the Superannuation Industry Supervision legislation.
There are several stakeholders to whom the Investment Strategy is important, each using the document in their own way. Some of those stakeholders include –
- Members of the SMSF. (This group will want assurance that the Investment Strategy of their superannuation fund accommodates their investment needs and risk profile.)
- Trustees of the SMSF. (These officers will take guidance from the documented strategy to measure the success of the strategy. They will also measure progress toward the goals and objectives of the members collectively, and individually.)
- The SMSF Auditor. (Auditors use the document for a number of purposes. Among them, transparency as to investment strategy settings; compliance with relevant regulations; and performance measures anticipated.)
- Any financial advisers to the SMSF. (Financial advisers need to ensure that any recommendations they provide to the trustees are compliant with their approved strategy.) – and
- The relevant Regulator of the SMSF.
What should the SMSF Investment Strategy document contain?
Apart from the usual identifying information about SMSF, it needs to cover the following –
- A statement as to the purpose of the Fund. It will state its financial goals and objectives (including acknowledgement of the sole purpose test applied under SIS legislation).
- Acknowledgement of the individual investment risk profiles of the members.
- Acknowledgement of the following –
- The risk of making various investments and the likely return from those investments.
- The diversity of investments to be used to moderate investment risk.
- The liquidity of the investment portfolio to ensure available funds to meet member needs.
- The ability of the fund to meet its prospective operating liabilities, and to meet member benefit payments when due. – and
- The requirement for and adequacy of any life insurance for members of the Fund.
Objectives to consider in an SMSF Investment Strategy document
The Objectives will focus on liquidity needs of the Fund (when cash will be required and where to access it). Other matters to include are:
- some investment key performance indicators (KPIs) showing average returns expected on a rolling three-, or five-year basis.
- how frequently a negative return might be acceptable to the members.
- a guideline index against which to measure investment portfolio performance (usually relevant to the assets into which the Fund invests). – and
- what components should contribute to the growth of the Fund from investing. (This should ideally identify to what extent by capital (market valuation) growth, or received income.)
Alignment of Investment Strategy with founding documents
The legislative requirements for the SMSF Investment Strategy are well documented and obvious. Trustees of Superannuation Funds are required to ensure that any investment asset/ product acquired, is allowed under the Trust Deed. A typical example that needs attention, is where a recommendation to use hybrid/ derivative products is being considered. As is the case with much of these matters, this requirement falls on Trustees of all super funds, not just SMSFs.
How frequently should the SMSF Investment Strategy be reviewed and/ or updated?
An annual review of the investment strategy should be considered undertaken. An ideal time for the review is when preparing documentation for the Fund Auditor. The strategy only needs to be revised when matters and circumstances have changed to warrant a revision. One such time when revision will always be required is responding to a change of relevant legislation or regulation.
We have an Investment Strategy service available to SMSF Trustees
The advice team at Continuum Financial Planners Pty Ltd is experienced in investment strategy formulation for SMSFs (self-managed super funds). To avail yourself of that service, call our office (07-34213456), or use our Book A Meeting facility at your convenience to arrange an appointment.
(This article was first posted in March 2024. It may occasionally be refreshed/ updated.)
