When an SMSF trustee documents the fund’s investment strategy, they are laying out their plan for managing the fund’s money.
Often, they express this by explaining how much of their fund will be invested in different “asset classes”. That’s really just a name for different groups of investments that have similar characteristics and behave in similar ways in the market. Different people classify investments differently but if Heffron is helping you to document your investment strategy, these are the names we’ll use and what they mean.
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Asset Class |
What this really means |
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Australian equities |
This classification is shares in Australian companies. It might be shares in a company listed on the Australian Stock Exchange (for example, Westpac Limited) or it might be shares in a private company. Both types are Australian Equities. |
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International equities |
This is shares in foreign companies. Again, they might be listed on a stock exchange in New York, London or elsewhere or they might be private companies based overseas. |
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Direct property |
If your SMSF is going to buy a property, classify this as “direct property” – it really just means property the fund owns directly rather than (say) investing in a property trust. |
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Listed property |
Property trusts are structures set up to buy property where each investor owns units in the trust rather than owning a share of the property directly. Property trusts where the units can be bought and sold on the Australian Stock Exchange are known as “listed property”. They’re also often called REITS (real estate investment trusts). |
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Unlisted indirect property |
Not all property trusts are listed on the Australian Stock Exchange – and this classification of “unlisted indirect property” is used for those that aren't. This classification can also include situations where the SMSF invests in a private unit trust that owns property – for example, one that is set up just for the SMSF. |
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Australian Fixed Interest |
Fixed interest investments are – as they sound – assets where the fund receives a regular interest payment for a specific period of time and the money gets paid back on maturity. The sorts of investments that go into this category would include term deposits, government bonds, corporate bonds, capital notes, debentures and income securities. It only includes those investments in Australia. |
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International Fixed Interest |
This is the international equivalent – it would include a corporate bond issued by a foreign company, for example. |
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Loans |
It’s rare but some SMSFs lend money to third parties or businesses. Their “investment” is the loan and it would fall into this category. |
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Cash |
This is essentially money in Australian bank accounts. |
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Foreign cash |
Foreign cash would include money in a foreign bank account or in a foreign currency. |
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Other |
Everything else goes in here! Often funds that invest in crypto currency, collectables would have something in the “other” category. |
Some tips
Investing through products like managed funds
Often SMSFs invest in things like “exchange traded funds” (ETFs), “listed investment companies” (LICs) or “managed funds”. These are all ways of bringing together lots of investments and giving investors like SMSFs easy access to just a part of these investments. For example, some managed funds might invest in a lots of different shares, bonds, and even property. If your strategy involves using these products, the asset allocations should reflect what those products hold. For example, consider an SMSF that invests all of its assets in a “balanced” managed fund. The managed fund says its investments will usually be:
Australian equities : 25% - 55%
International equities : 0% - 30%
Listed property : 0% - 30%
Australian Fixed Interest : 15% - 45%
International Fixed Interest : 0 – 10%
Cash : 0 – 35%
The SMSF’s investment strategy should show the same (or similar) ranges. That’s because the purpose of the strategy is to show how the fund’s money will ultimately be invested.
Cash
An SMSF’s investment strategy would always include at least some cash – because contributions coming in won’t be invested immediately, the fund will have expenses to pay and the trustee is obliged to make sure it always has enough liquidity (cash).
Ranges
Trustees are required to invest in accordance with the fund's investment strategy. Asset ranges which are too narrow can be problematic. While it’s not illegal to stray outside the ranges from time to time, if it does happen the fund’s auditor will expect to see that the trustee has either changed their strategy or documented the reasons for the discrepancy. For investments that move around a bit in value, allowing for a buffer can help. For example, having a range of (say) 40% - 60% rather than 50% - 55%.
But the ranges shouldn’t be so broad that it’s not clear what the strategy really is. For example, 0% - 100% for multiple asset classes doesn’t really help demonstrate where the trustee intends to invest.
Borrowing
When SMSFs borrow to invest, the investment strategy is focused on what they buy with the money.
For example, Kim’s SMSF borrowed $400,000 to buy a residential property worth $500,000. In addition to the property, her fund has a small cash balance ($50,000). For the next few years, all the fund’s spare cash will be used to pay down the loan. So at the moment, the fund has investments of $550,000 (the property and cash).
It looks like the SMSF’s Investment Strategy is something like:
Direct property : 80% - 100%
Cash : 0 – 20%
(Currently the $50,000 in cash is around 10% of the fund’s total investments of $550,000. That will go up and down as contributions are received and loan repayments made.)
Note that we ignored the fact that the fund has a loan here. We wouldn’t put that amount in the “Loan” asset class because that’s for cases where the fund is lending money to other people, not where it’s borrowing to make its own investments.
At some point, when the loan has been paid off, the fund’s strategy might change. Perhaps it will start to build up a portfolio of shares – in which case a new investment strategy document should be prepared.
Please note that this article is intended to provide general information about how an SMSF trustee might document their investment strategy. It is not financial advice and should not be treated as such. If you need investment advice to help you decide what your SMSF's investment strategy should be, you should get in touch with a licensed financial adviser.
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