In an online article, SuperConcepts executive manager SMSF technical and private wealth Graeme Colley reminded SMSF trustees that the investment strategy is the “backbone of the fund” and is the plan for making, holding and realising investments in line with the fund’s investment objectives.
“As part of the investment strategy, the fund’s trustees need to put a portfolio of investments in place, but this can be a bit of a high wire act when markets are volatile,” said Mr Colley.
Mr Colley explained that what makes a good investment for an SMSF will depend on each fund’s objectives.
“For example, a fund with relatively young members may be looking for investments with a high capital growth component and a lower amount of income being paid as interest, rent and dividends,” he explained.
“In contrast, an SMSF consisting of retired or older members may be considering investments with higher income yields and lower capital growth to help with cash flow.”
As markets move, fund trustees, he said, may need to rebalance the fund’s portfolio.
“This may occur if there is a significant increase in the value of the fund’s portfolio of listed shares and require a reallocation of the fund’s investments into property, cash and term deposits,” he said.
“The reason for the reallocation will help to align the fund’s investments with its investment strategy.”
Mr Colley explained that the trustees might also need to review and adjust the fund’s investment strategy in some situations.
“[However], this is a long-term objective and would be expected to occur at less regular intervals than the reallocation of fund investments,” he said.
“An example requiring a review of the fund’s investment strategy may be necessary when a member leaves the fund or commences a pension to increase the fund’s liquidity.”
He also pointed out that rebalancing a fund’s investment portfolio may be difficult where the fund owns a significant investment where its value has increased significantly or an investment that proves difficult to sell.
“Examples include real estate, shares in private companies or unit trusts and specialised investments such as artwork and collectables,” said Mr Colley.
“This decision may come down to how investments are classified in the fund. However, as the fund changes over time, trustees are likely to face some level of rebalancing the fund’s investments.”
Mr Colley said trustees should be aware also that it will be up to the fund’s auditor to determine whether the fund’s investment strategy and allocation are in alignment or not.
“Failing to meet the requirements of an investment strategy and put it into action is a compliance issue for the fund and can be reported to the ATO by the fund’s auditor in an audit contravention report. As a trustee, you should study your responsibilities more closely to avoid such incidents,” he warned.
