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Self Managed Super Fund (SMSF) Article
How should SMSF trustees invest their money?

By Tony Negline.

This article may be out of date.

3rd October 2007

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Like any investor, Self Managed Super Fund trustees are spoilt for choice when deciding where to invest their fund’s money.

Recent research by the Federal Government’s Financial Literacy Foundation has confirmed the obvious point that too much choice in any human endeavour can lead to paralysis in positive decision making.

Which raises the question, where shuld trustees consider investing their money?

Broadly the super legislation tells us two points about this topic.  Firstly, trustees are told what they can and cannot do – for example, trustees may only invest a small percentage of their fund’s assets into a business that their member’s own.  Secondly trustees are told that they should create and implement an investment strategy for the whole fund.

A super fund’s investment strategy should look at four specific aspects:

By any stretch of the imagination this is a complex list of requirements to satisfy.  The SMSF regulator, the tax office, has said that they want to see fund’s take this requirement very seriously.  However the ATO does not review or comment on a fund’s investment strategy and does not look to see if a fund is financially sound.

Once a fund trustee satisfies all these legal requirements they are free to put their funds money wherever they like.

In reality SMSFs invest in a wide array of areas.  According to ATO data released in 2006, SMSFs invested 55% of their money in equities, 23% in cash, 11% in property, 6% in life office and managed funds, 0.6% overseas and 7% in other assets.

All other funds invested in the following categories: 55% in equities, 8% in property, 15% in fixed interest, 8% in cash and 12% in other assets.

There is a lot of similarity between these broad asset class categories.  The level of cash in Self Managed Super Funds tends to be a talking point.  It needs to be borne in mind that the SMSF data comes from the annual return each fund sends the ATO.  The data is recorded at the end of each fund’s financial year end which often also coincides with when contributions have been made.  That cash is then invested during the following financial year.  SMSFs often appear to be cash heavy but in reality their levels of cash is being overstated.  It is true however that some SMSF trustees have decided to invest all their fund’s assets in bank accounts earning negligible interest.

The data for other funds is more accurate because they have to report large amounts of data to their regulator, the Australian Prudential Regulation Authority, at least every quarter.

How often should a SMSF trustees look at their investments?  This is the sixty-four million dollar question.  The simplest answer is, whenever they either think it wise to do so or circumstances dictate that they have to look at them.

Anyone who invests in listed equities will know that corporate activity occurs frequently.  Companies are taken over, merge, make special distributions of capital, seek to buy their shares back and so on.  Everytime one of these activities occurs the trustees will need to think about where their fund’s investments.

For example, if a company is being taken over and the take-over involves either receiving cash or owning another company’s stock then a trustee has to decide to either take the cash and invest elsewhere or take the new company’ shares.  A trustee can only do this by reviewing their investment strategy.  The tax aspects also need to be thought about.

Some trustees will only want to review their investment strategy when they absolutely have to.  Others will feel more comfortable doing it much more frequently.

Everyone will have a different way of looking at these aspects.  It’s perhaps instructive to consider what the Future Fund trustees have decided to do.  The Future Fund has been set up by the Federal Government and is designed to provide enough funds by 2020 to fully fund Commonwealth public service super benefits.  It currently has $60 billion in it.

The government has given the Future Fund’s board the job of delivering a return of at least the inflation rate plus 5% over a rolling ten year period.  This is an aggressive rate of return.  It is common to see CPI plus 2% or 3%.  The Fund’s board have said that “the investment return over a single year is not a particular focus and the Board believes that assessments about the probability of delivering on the long term objective are best made over at least rolling 5 year periods.”  The Future Fund is investing for the long term – at least 13 years – before it has to pay out any money.  Most SMSFs invest for much longer periods and trustees should therefore think longer term rather than shorter term.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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