What is an Investment Strategy
Prior to Investing your Super Benefit, it is a requirement under current Super Laws that an SMSF formulate and give effect to an Investment Strategy. An Investment Strategy is simply a plan for making, holding and realising SMSF Investments that reflects the SMSF's Objectives (eg increasing the value of members' interests). In establishing an Investment Strategy the following steps should be taken into account.
Step 1: Develop Investment Objectives.
Step 2: Develop a strategy to achieve the Investment Objectives.
Step 3: Monitor the Objective and Strategy with a periodic Investment Review.
Let's consider each step below:
Develop Investment Objectives
The Investment Objective of the SMSF is to maximise member returns having regard to risk and must be in accordance with Trust Deed governing the SMSF's operations. The SMSF Trustee, in setting the Investment Objectives, must take into account the following:
Risk and return
The risk involved in making, holding and realising Investments and the likely return from the Investments, having regard to the SMSF's objectives and its expected cash flow requirements.
The composition of the SMSF's Investments as a whole, including the extent to which the Investments are diverse or involve the SMSF being exposed to risk from inadequate diversification.
The liquidity of the SMSF's Investments having regard to its expected cash flow requirements.
The ability of the SMSF to pay Member Benefits and other liabilities, both current and prospective.
Develop a strategy to achieve Investment Objectives
Once the Trustee has developed the Investment Objectives of the SMSF they will need to develop a strategy to achieve the Investment Objectives. Typically this will involve detailing the Asset Classes that will be considered to achieve the Investment Objectives. Under the standard Investment Strategy provided by ESUPERFUND acceptable Investments include:
Undertake an Annual Investment Review
The SMSF Trustees must review the Investment Objectives of the SMSF annually and at such other times as a significant event occurs which affects the SMSF. This does NOT mean that each individual SMSF Investment must be reviewed. Individual Investments can be overseen on a daily basis (i.e. the sharemarket can change rapidly) and changed at any time that a buy or sell criteria is met. The Investment Review relates to adjustments to the overall structure of the SMSF. For example the SMSF Trustee may decide over time to change the SMSF's asset allocation when moving from working to retirement, or the methodology when choosing asset Investments.
Investment Strategy is NOT a Financial Plan
Most clients establishing an SMSF assume that an Investment Strategy is a Financial Plan for their SMSF and proceed to draft a document that details the specific Investments they want to make for the SMSF. For example clients when drafting their Investment Strategy will provide specific details of the assets they wish to acquire (eg shares or cash) and the respective percentage allocation to each asset class. This is NOT an Investment Strategy required under current Super Laws, but a Financial Plan. This level of detail is NOT required when formulating your SMSF Investment Strategy.
Percentage Investment Range
It is important to understand that the SMSF Investment Strategy does not need to specify the percentage or percentage range that will be invested in each asset class. Each asset class should be considered on its own Investment merits having regard to an appropriate degree of diversification. Many SMSF Trustees will dictate the percentage or the percentage range their SMSF will invest in each asset class. For example they may specify that 60% of monies will be invested in Shares and 40% in Term Deposits. This is unnecessary and not recommended. Individual circumstances change and you should not restrict your SMSF to having to invest a certain percentage in a certain asset class or even worse cap the percentage that can be invested in a particular asset class. In the 2008 Global Financial Crisis it may have been appropriate to switch all monies into Government Guaranteed cash Investments. A restrictive Investment Strategy would not have allowed this.
Single Asset Investment Strategy
This then raises the next issue of whether an SMSF can invest in one asset or one asset class only. For example can an SMSF invest 100% of monies in CFDs, in Gold, in one property or one share, say BHP? The answer is Yes. But only if the Investment conforms with the SMSF Investment Strategy. Most importantly, you must prepare an Investment Minute detailing the reason for the Investment and how it conforms to the SMSF Investment Strategy. For example many clients invest 100% of SMSF monies in Gold for capital appreciation and to maintain the purchasing power of their Investments in an accelerating inflation and currency environment. Similarly some clients invest all SMSF monies in one property for capital appreciation and a solid rental yield. Both strategies are acceptable but you must prepare an Investment Minute detailing the rationale for the Investments and how they conform with the SMSF Investment Strategy. Always!
Remember Risk and Diversification
Whilst there is no specific prohibition to investing 100% of your super monies in one asset class as detailed above, where such a strategy is adopted, it is important to remember that risk and diversification are important considerations when implementing your SMSF Investment Strategy. A "one asset" strategy may be considered as increasing your Funds Risk Profile and may not be adequately diversified to mitigate Investment Risk. So while this strategy is not specifically prohibited you must carefully detail why it is appropriate for your SMSF if it is adopted
Standard Investment Strategy
When you establish an SMSF with ESUPERFUND we will provide an example of an Investment Strategy for your SMSF. You may adopt the Standard Investment Strategy for your SMSF or modify it as you deem necessary. The Standard Investment Strategy is very flexible and in no way restrictive. It does not specify percentage Investment ranges and gives you the flexibility in designing and implementing Investments for your SMSF as you deem appropriate as the SMSF Trustee.
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