So what else is important for you as trustee of your SMSF when considering the investment objectives and strategy for your SMSF?

Meaningful and measurable

The first tip here is to ensure that whatever you write into your investment objectives and strategy, make sure that it does describe broadly how you intend to invest your SMSF money and that there is a benchmark for assessing how your investments are going compared to your long term performance expectations for your SMSF portfolio.

As we emphasised before, there is no template or correct way to write your investment objectives and strategy set out in superannuation law. There are however, ways to express your investment intentions that are considered best practice in setting out your investment objectives and describing the broad investment categories you wish to invest in.

Let’s have a look at some effective and easy ways for you to meet your trustee obligations and ensure you are meeting the expectations of the ATO at the same time.

Investment objectives

The purpose of setting an investment objective for your SMSF is for you to provide guidance as trustee as to your performance expectations of your chosen portfolio.

Remember too that you are setting these objectives for your SMSF, so set objectives which fit with your investment risk appetite and that of the other members of your SMSF. You can be as aggressive or conservative as you are comfortable with. No-one can dictate how you must invest your money, not even the ATO.

So for example, your investment objective may be “to achieve a long term return of 3% above inflation” or it may be “to seek an average positive return over any rolling three-year period while avoiding loss of capital wherever possible”.

It doesn’t matter what it says as long as it sets an objective that in turn sets a benchmark against which actual performance can be measured. You know what sort of return you want from your investments. Just put in down in writing.

Set an investment objective that is reasonably achievable

Another tip here is to be sure to consider the likely return you can expect to generate on the investments you intend to choose to invest in when setting your objectives and performance of your portfolio. You want your SMSF investment portfolio to broadly achieve the investment objectives you have set in most years.

Why is this important?

As an investor, you will generally have an idea of the kind of overall return you are expecting from your investments. You will review your portfolio and its performance as often as you consider necessary and make changes to investments as you see fit.

In the context of your SMSF, a documented investment objective is doing exactly this but in a more formal way so that your SMSF auditor, the ATO and you as trustee can see how your SMSF is going and whether the fund investments are meeting your short, medium and/or long term investment objectives.

The ATO and your auditor will be happy

As we said earlier you broadly want your SMSF investment objectives to generally be met by the underlying fund investments you have chosen. In circumstances where this happens, the ATO will generally be happy for you to document any review of your portfolio and its performance and any small changes you consider necessary. Generally, in these circumstances, they will be happy for you to broadly leave your current investment objectives and portfolio in place without further amendment or adjustment.

This is the position you want to be in.

Where however, your portfolio is not performing and delivering expected returns in line with your stated investment objectives, there is an expectation by the ATO of a more thorough review of your investment decisions, the make-up of your portfolio, why it is not performing as expected, what changes if any are needed, and so on.

This is the position you want to avoid whenever possible.

Set an investment objective that is reasonably achievable

As we said earlier you broadly want your SMSF investment objectives to generally be met by the underlying fund investments you have chosen. In circumstances where this happens, the ATO will generally be happy for you to document any review of your portfolio and its performance and any small changes you consider necessary. Generally, in these circumstances, they will be happy for you to broadly leave your current investment objectives and portfolio in place without further amendment or adjustment.

This is the position you want to be in.

Where however, your portfolio is not performing and delivering expected returns in line with your stated investment objectives, there is an expectation by the ATO of a more thorough review of your investment decisions, the make-up of your portfolio, why it is not performing as expected, what changes if any are needed, and so on.

This is the position you want to avoid whenever possible.

How to keep them happy even if our portfolio doesn’t perform as expected

Of course, we don’t have control over the investment markets and the assets we invest in. Sometimes a mismatch between our objectives and actual return on our portfolio will be inevitable.

The important tip here is not to panic. You simply need to go through a process to fulfil your trustee obligations, so you can move on, which is all you really want to do when markets and your investments are not performing well.

The best process to follow in these circumstances is to put down in writing what you have done to review your portfolio, what changes you may consider necessary and why, and then implement those changes.

Importantly, if you believe that no changes, or only minor changes, need to be made than that’s fine as well. You may, for example, be of the view that short term market volatility is responsible for the mismatch between investment objectives and portfolio performance. Your view may be that long term, your investment objectives and settings are correct and so no wholesale changes are necessary. This is perfectly alright. Just document your reasons and be sure to be able to produce the documentation when asked for it by your auditor or the ATO.

Investment Strategy

The investment strategy merely sets out what the make-up of your SMSF portfolio will look like. At the same time, the underlying portfolio of your SMSF must be reflected in the investment strategy. In other words, the two must reflect each other. Your SMSF auditor must sign off each year as part of the annual audit that this is the case, so it is important!

• Cash: 0 % – 25%
• Australian fixed interest: 0% – 15%
• Australian listed shares: 30% – 80%
• International listed shares: 0% – 10%
• Direct property: 50% – 95%

The above is no more than an example of what your investment strategy might look like and is not even meant as a guide, as your investment strategy can be expressed however you like.

However, what is important is that however it is expressed, your investment strategy must be meaningful and be capable of being measured against the investment objectives you have set.

The word “meaningful” here is used in the sense that if someone were to read your investment strategy, they would have a general understanding of how you have invested your SMSF money just by reading that document. Your SMSF portfolio would and should reflect your written investment strategy.

It should also be clear from this discussion, that an investment strategy of 0% – 100% in each asset class is neither meaningful nor measurable, and is generally not acceptable to the ATO.

While the above is generally true, there are always exceptions to the general rule!

For example, as “single asset” strategy, where close to 100% of the assets of an SMSF are invested in a single residential property is acceptable. The investment strategy would need to reflect this by having the direct property asset allocation as something like 50% – 100%. Remember that the investment strategy must reflect the actual investments of your SMSF and vice versa.

The wrap up

• In summarising the above, the key points are:
• Put your investment objective and strategy in writing
• Set an investment objective that you can comfortably achieve with the underlying investments you are comfortable to invest in
• There is no template for an investment objective and strategy, but make sure they reflect how you intend to invest your SMSF money
• The investments you actually make must also be accommodated by the investment strategy you have set
• Review your portfolio and assess it against the objectives you have set as often as you feel it is necessary
• Most importantly, document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have indeed satisfied your obligations as a trustee in this important area.