Do's and don’ts of repositioning your SMSF portfolio

Given COVID-19 volatility, trustees should be revisiting the objectives they have set for their long-term retirement savings as well as the investments.

One of the many benefits of using a self-managed superannuation fund (SMSF) for retirement savings is that when investment markets are turbulent, it is possible for SMSF trustees to react quickly and reposition their portfolio’s asset allocation.

Many SMSF trustees will have done just that given the disruption to markets across the globe in recent weeks.

Other SMSF trustees may have chosen to ride out the volatility, making minimal changes to their portfolios. This is likely to have meant that the value of their investments in different asset classes has fluctuated significantly.

In either case, SMSF trustees have a legal obligation to address these changes in the context of the investment objectives and strategy they have set for their SMSF. All SMSF trustees should be revisiting the objectives they have set for their long-term retirement savings as well as the investments they have chosen to achieve those objectives in the current economic climate.

A regular review of the investment objectives and strategy is also a legal obligation. The term "regular" is not defined in superannuation law, but typically once or twice a year is considered good practice in stable economic times. In these more turbulent times, regular takes on a whole new meaning and requires SMSF trustees to examine their investment decisions far more frequently.

So it’s worth re-examining the purpose of investment objectives and strategy for an SMSF and then setting out how trustees need to respond to the changes in their investment portfolios.

An investment strategy should be considered the SMSF’s blueprint when dealing with the fund’s assets to ensure its investment objectives and members’ retirement savings goals are likely to be met. It provides the parameters around the types of investments trustees may make and the proportion of the total value of the SMSF invested in any one particular investment or asset class.

Before any investment decision is implemented, trustees should examine the impact it will have on the total portfolio of the SMSF to ensure they invest their money in accordance with that strategy. While not a legal requirement, it is best practice for the investment objectives and strategy to be in writing.

An SMSF investment strategy must consider the following items:

• The risks involving in making, holding and realising the SMSF's investments, its expected return as well as cash flow requirements of the SMSF;
• The diversification and composition of SMSF investments;
• The liquidity of the SMSF investments in terms of expected cash flow requirements;
• The SMSF’s ability to pay current and future liabilities, including benefits to the members;
• Whether to hold insurance cover for each SMSF member.

It is important to understand that the investment objectives and strategy are not set in stone. This is not a compliance “once-off” that can be set and then forgotten. Trustees can change the investment objectives and the underlying investment parameters they have set to achieve the objectives for their SMSF at any time and as often as they feel is appropriate.

Any decision made to change either the investment objectives or strategy by SMSF trustees needs to be recorded in a written minute, outlining the reasons and considerations considered by the trustees in their deliberations. The actual investment objectives and strategy need to be amended to reflect the changes the trustees wish to make, and this new document needs to be executed and signed by the trustees as the current and correct version.

Although much of this may seem overly bureaucratic, where SMSF trustees have not complied with the appropriate documentation and implementation of their investment strategy requirements under superannuation law this may be treated as a breach of their trustee obligations. As such, they may be liable to administrative penalties being imposed by the ATO. The SMSF’s auditor also must sign off each year.

For trustees to stay on the right side of their fund auditor and the ATO, there a few simple steps they need to follow:

• Put the SMSF investment objectives and strategy in writing and review them regularly.
• There is no official ATO template for an investment objective and strategy, but trustees need to make sure the document they execute reflects how they invest.
• If trustees wish to make an investment outside their current documented investment strategy, they should execute appropriate changes to the investment strategy document first before making the investment.
• Where market movement has put SMSF investments outside the current documented investment strategy, trustees have two choices: sell appropriate assets to bring the actual investments within the current documented investment strategy of the fund; or amend the investment strategy document to reflect the changed circumstances of the SMSF’s investments.
• Most importantly, document your actions and decisions, as well as your reasons, and keep them as a record to demonstrate that you have satisfied your obligations as a trustee in this important area.

We recommend that trustees gain the assistance of an SMSF Specialist to help them achieve their SMSF portfolio goals. Use our online Find a Specialist directory here to discover your nearest, independently accredited SMSF Specialist.

First published in the Financial Review on 23 April 2020.