How to write an investment strategy for an SMSF

An investment strategy sets out what you expect to achieve with an SMSF.

Follow these steps to create an SMSF investment strategy that works.

Updated 3 August 2017. 

By Andrew Blore

A solid investment strategy is not only integral to the success of your self-managed super fund (SMSF), but it can also provide you with protection if you’re ever called upon to justify an investment decision in the event of a loss.

The investment strategy sets out your super fund’s investment objectives and the methods it will adopt to achieve those objectives. It enables SMSF trustees to make investment decisions consistent with their objectives and to increase and protect members’ benefits for their retirement.

Having an investment strategy for your SMSF is not optional.

The legislation requires each trustee to formulate and give effect to a strategy that has regard to the circumstances of the SMSF as a whole. When making investment decisions, these duties and obligations are imposed on SMSF trustees by super law.

The investment strategy obligation forms part of the Superannuation Industry Supervision Act 1993 (SIS) covenants in section 52(6) and these should be included in the governing rules of the SMSF.

What your SMSF investment strategy should include

The strategy should include, but is not limited to:

  • The risk involved in making, holding and realising, and the likely return from, the SMSF’s investments with regard to the fund’s objectives and 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 fund being exposed to risks from inadequate diversification
  • The liquidity of the SMSF’s investments with regard to its expected cash flow requirements
  • The ability of the SMSF to discharge its existing and prospective liabilities.

Also, if the SMSF has any reserves, the trustees must formulate and give effect to a strategy for their prudential management consistent with the SMSF’s capacity to discharge its liabilities (whether actual or contingent) as and when they fall due.

What your investment strategy needs to consider

The investment strategy should also take into account, among other considerations:

  • The size of the SMSF
  • Its tax position
  • Its membership profile
  • The costs of administrating an investment
  • Ongoing management costs
  • Access to appropriate advice and engagement of professionals

The strategy should be continually monitored, reviewed regularly and updated when necessary. This is especially important to keep it relevant and updated in light of legislative amendments, member profile changes and changes in the economic climate and financial or investment markets.

Trustees should also address any limitations or investment constraints, such as the sole purpose test and other specific investment standards of the SIS Act.

Write it down

There is no explicit requirement for the investment strategy to be in writing, but it is the most prudent method to prove that an investment is made within the strategy framework.

It does not necessarily need to be a long document – around 800 to 1000 words could suffice.

Writing it down is important because the SIS Act permits a person, such as a member or their dependant, who has suffered a loss or damage from an investment to recover the amounts of that loss or damage from the trustee.

However, the investment strategy forms a defence if the trustee establishes that the investment was made in accordance with an investment strategy formulated under the covenant in section 52(6).

Further, a contravention of the requirement to have an acceptable investment strategy can result in the trustees being fined or sued for loss or damages. The fund can lose its compliance status and, as a result, its concessional rate of tax. A trustee who intentionally or recklessly fails to comply with their investment strategy is guilty of an offence and liable to a penalty.

So while an investment strategy is an important legal requirement, it is also a practical approach to ensure that the SMSF’s assets are invested appropriately to provide benefits for members in their retirement.

Read next: What do SMSF trustees want from their advisers?

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