SMSF investment strategy

Planning a sound investment plan

Why is an investment strategy important?

A good SMSF investment strategy helps to maximise investment returns and build the fund’s assets. The strategy is much like any superannuation strategy and should usually include a mix of assets and risk levels.

The actual investments are decided by the fund trustees or by professional fund managers on behalf of the SMSF. The strategy outlines the types of assets that best suit the members’ interests, and the proportion of each asset type in the overall portfolio.

What can an SMSF invest in?

Much like standard personal investment strategies, SMFSs can invest in a range of assets, including:

Shares – Australian, international, listed, and unlisted
Bonds and other fixed-income assets
Property – residential and commercial
Cash and term deposits
Commodities
Collectables including antiques and art

How do SMSF investment strategies differ?

The three main differences between typical SMSF asset allocation and those of regular super funds are:

Regular funds tend to be more diversified, though there is nothing stopping an SMSF from diversifying widely.
Likewise, it’s easy for members of regular super funds to manage their accounts online and tailor the diversity of their investments, depending on their goals at the time.
Regular funds often have more access to, and investment in, commercial property assets, whereas SMSFs tend to invest more in residential real estate.
Regular funds are usually in a better position to invest directly in big infrastructure projects, major commercial property developments, and private equity. These are usually out of reach for most SMSFs.

What is an SMSF investment strategy?

As well as being a plan for how the SMSF trustees will invest funds, hold assets, and return those assets back into cash, an SMSF investment strategy is also a requirement of the ATO and must be assessed in the SMSF’s annual independent audit.

The auditor can inform the ATO if they feel the investment strategy is not being followed correctly.

How to comply with the ATO’s investment strategy rules.

The fundamental aim of any SMSF investment strategy is to effectively meet each member’s retirement goals. Of course, every member and every SMSF is different, so each fund’s investment strategy will be unique, but they must all work in the best interests of the members.

To comply with ATO rules, a proper SMSF investment strategy should consider:

Investment risks for each asset. Are these risks in line with the risk profiles or comfort of the members? Do the risks take account of each member’s age and anticipated retirement date?
Diversification. Having a mix of assets and risk levels will help buffer the fund from fluctuations in a single asset class. The strategy should include clearly defined ratio ranges for each asset type, and while these do not need to be exact, they should also not be so wide that they don’t actually provide any guidance at all. A good strategy also includes reasons behind the diversification and choice of assets.
Liquidity of assets. The SMSF may need to sell assets quickly to meet expenses or take advantage of a suitable investment opportunity. The liquidity of assets – i.e. the ease with which they can be sold at a reasonable price – and their role in asset choice must be outlined in the strategy. Much of this comes down to balancing liquidity versus risk versus returns.
Ability to meet benefit payouts. Linked to liquidity, the SMSF must be able to show that it would be able to meet the benefit payments outlined in the trust deed, either over time or as a lump sum.
Personal insurance cover for each member member is optional but must be considered if it’s appropriate.
Regular review. Circumstances change, either through the mere passing of time, sudden upheavals in life, or changes in the wider economic environment. For this reason, the investment strategy should be regularly reviewed, to take into account members’ age, retirement status, risk comfort, the diversification mix and types of assets, and national and global economic factors. An annual review is often recommended.

The strategy should be detailed and specific, including defining the proportion of each asset type, and the target range of expected return.

Limits on investment

Under the SMSF regulations, there are some limits on what the fund can invest in.

In-house investments are loans, leases, or investments that the fund has with its own members. These can make up no more than 5% of the SMSF’s total assets.
An SMSF can invest any amount in a private company, as long as the SMSF members don’t have controlling ownership of it. If the company is a related entity, then the value of the SMSF’s investment in that company cannot make up more than 5% of the SMSF’s total assets.

There are also limitations on property investments in an SMSF around the purchase and use of the property.