Your first SMSF portfolio
One of the first tasks for trustees of new self-managed superannuation funds (SMSFs) is to create their first investment portfolio, typically from scratch.
This can be a highly-satisfying yet sometimes challenging experience.
The beginning of a new financial year is always a peak time for the establishment of SMSFs.
There is obviously plenty to think about when structuring a portfolio for a new SMSF. Points to consider include:
- Setting a compulsory investment strategy. SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund. These circumstances include: investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. (The SMSF Association offers a free course for SMSF trustees, which includes the fundamental investment rules.)
- Investing within the rules. Trustees must: maintain a super fund for the sole purpose of providing member retirement benefits; not provide loans or financial assistance to members or their relatives; separate SMSF assets from their own personal or business assets; conduct transactions on an arm's length basis; and adhere to the investment restrictions under the "in-house asset rule"*. (For more on investment rules, including acquisition of assets from members, see SMSF restrictions on investments on the ATO's website)
- Choosing an SMSF's target or strategic asset allocation. A portfolio's asset allocation - the proportions of its total assets that are invested in different asset classes of mainly local shares, international shares, fixed interest and cash - spreads risks and opportunities. Research has long found that a diversified portfolio's strategic asset allocation is responsible for the vast majority of its return over time. (See All-terrain investing with ETFs, Smart Investing, July 10.)
- Selecting investments within a fund's strategic asset allocation. More investors are using a "core-satellite" approach to invest in accordance with their asset allocation. With this strategy, the core of their portfolio is held in low-cost traditional index funds or Exchange Traded Funds (ETFs) tracking selected indices with smaller "satellites" of favoured direct securities and/or actively-managed funds.
- Getting the most from a skilled financial planner. Fledgling SMSF trustees can really benefit from quality financial planning advice with the establishment of a fund's first portfolio and with the running of that portfolio. The setting-up of an SMSF is one of those times when financial planning advice can be critical.
For the past 14 years, Vanguard has studied "adviser's alpha". This is the value that advisers can add through their wealth management and financial planning skills - guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing - and as behavioural coaches.
In other words, skilful advisers can add considerable value by using skilful wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing. (See the Australian edition of this classic research on adviser's alpha.)
Welcome to the ranks of the new SMSF trustees for 2015-16. You are joining a force of more than 550,000 funds with $600 billion in assets.
* Under the "in-house asset rule" in superannuation law, SMSFs are generally prohibited from making loans, providing leases or having investments with related parties and entities that exceed 5 per cent of its total asset value. Certain exceptions apply including business property.
By Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
16 July 2015