What is an Investment Strategy?

The investment strategy is not just a required document for a super fund audit, it guides the entire direction of the fund’s investments.

An SMSF trustee is required to document an investment strategy that has regard to the following:

  • The risk in making holding and realising assets
  • Likely return from investments
  • Liquidity of investments in comparison to expected cash flow requirements of the fund.
  • Investment composition as a whole, including diversification or risks of inadequate diversification.
  • Fund’s ability to discharge its liabilities
  • Insurance requirements of the members.

While it is not incorrect to invest in only one asset class such as property, shares or fixed interest, it is best practice to document the reasons for investing in one asset class.

An investment strategy is not just a compliance document to keep the auditor happy. It is a document that explains why the trustees have invested the way they have, and the reasons why the investments, and insurances when held are suited to meet the member’s interests.

ATO letter – Is your SMSF Investment Strategy meeting diversification requirements?

Recently the ATO sent letters to 17,700 SMSF trustees where they believe the investment strategies of the fund might not meet the diversification requirements under the Superannuation Industry (Supervision) Act. The SMSF trustees that received these letters had 90% of the fund’s assets invested in one asset such as direct property and may have a loan to purchase the asset.

The best way for a trustee that has received an ATO letter is to document the fund’s acknowledgement of the letter via a trustee minute. We would suggest detailing further why there is only one asset in the fund. It will also be beneficial to detail the timeframe before pensions are expected to be paid, and what is the debt reduction strategy if a loan is in place. The trustees should also include details on the ongoing monitoring of cash flows to ensure obligations are met.

Time to review the fund’s investment strategy

Even if you didn’t receive a letter from the ATO, an updated investment strategy is a great way to review the current investments of the fund and consider if the investments meet the retirement objectives of all members. All trustees should be engaged with this process and where required, obtain professional advice to ensure adequate diversification and insurance needs.

Please don’t hesitate to contact our team with any questions.