Get your SMSF back on track ? or else

PORTFOLIO POINT: Market volatility can throw SMSF asset allocations out of whack with stated investment strategies, potentially leaving you in the sights of the tax office.

By the time Australia’s stockmarket was hitting its low point a year ago, many SMSF trustees had long since abandoned their investment plans.

The market fall, we were told, was a once-in-a-generation event. The ASX 200 had fallen about 55% from its highs, as had international shares, and the commercial property sector had been decimated. Cash was king, but the Reserve Bank’s rate cuts dented its crown; at least the returns were positive.

As for fixed interest and bonds – what the heck were they? The bull market had been going for so long people had forgotten what they were, only to discover that they perform best in times of crisis.

SMSF trustees, as a whole, were cashed up. For some it was a deliberate strategy; others had sold out of the market, gripped with fear and unable to deal with further losses. While SMSF trustees have traditionally always been overweight cash and Australian equities, they were now grossly overweight cash.

Figures from industry groups, such as SMSF service provider Multiport, show trustees have since continued to plough back into equities, swapping cash for Australian equities in increasing numbers.

For many trustees, the shift to cash then back into equities has been dramatic. Share purchases, plus the growth in the value of the shares over the past 12 months could have seen the overall allocation to Australian shares increase dramatically, while cash holdings have tumbled.

During this period of extreme volatility, SMSF trustees were probably not considering their overall “investment strategy”. And ignoring the fund’s official investment strategy – or not having one at all – is something that can land you in serious trouble with the tax office.

An investment strategy is a fundamental requirement of all super funds. It is supposed to take into account the financial goals of the fund, the risks it is allowed to take and how members’ investments are to be spread across investment classes. And it should allow for members’ different investment time frames and risk profiles.

It’s one of the first things the tax office will ask for in an audit. If your investments don’t reflect it when the taxman comes knocking you are asking for trouble.

Most investors are now familiar with asset allocation based on risk profiles, an important part of classic investment that has served many investors over the years.

nRisk profile investment allocations (%)
	Cash	Fixed interest	Property	Australian shares	Internat'l shares
Defensive	20	60	5	10	5
Conservative	15	45	5	20	15
Balanced	10	30	10	30	20
Growth	5	15	10	40	30
High Growth	0	0	10	50	40

Investment strategies do not have to be rigid, but they have to exist. SMSFs whose numbers have differing risk profiles might come up with the following scenario that creates minimum weightings to particular asset classes rather than prescribing absolute allocations.

(Please note that an investment strategy is far more complex than simply an asset allocation table.)

Leave it too loose and the tax office might consider you’re not taking it seriously; too tight and you might find market changes will put you well outside your limits in any major downturn or upswing.

If your investment decisions have found you inside or outside your investment strategy’s minimum and maximum weightings, you’re in breach. You have two options: to revise your investment strategy so that it fits your current investments; or to prepare a trustee minute that allows you to operate outside the strategy temporarily, for short-term tactical reasons.

An investment strategy isn’t just there for fun. It’s designed to show that trustees have carefully considered the asset allocation that would be appropriate for the fund members at the various stages of their lives.

The fluctuations of recent years, including the massive bounces in the past 12 months, will have put many SMSF trustees at least temporarily outside their official investment strategies. It’s something that requires regular monitoring. In fast-moving markets that means at least twice a year.

Many SMSF trustees will have recently received an email or regular mail from Macquarie about a proposed shift of their Macquarie Cash Management Trust (CMTs) to a Cash Management Account (CMA) structure.

Until a few years ago, the Macquarie CMT was the largest managed fund in Australia and at one stage held more than $16 billion. It was/is used by 30–40% of all SMSFs as their base bank account, according to Macquarie. It is important to note that it is not a bank account, but the way it had been structured gave it the functionality of most bank accounts.

It was popular because it did not charge fees (unless you needed a cheque books) and it paid a reasonable interest rate, unlike the accounts offered to SMSFs by major banks.

The advent of the government guarantee has effectively killed off the CMT. Because of the trust structure, Macquarie had to pay the insurance premium for any amount in there above $1 million (not $1 million per client). This meant the interest rate on CMT dropped by around the cost of the guarantee levy. Further, the recent decision by the government to remove the wholesale guarantee further removes the security for CMT investors (essentially it removed the life support that it did have).

Macquarie quickly put into place a CMA structure for clients. Now, about 18 months down the track, CMT is all but dead as a vehicle for new investors and Macquarie has decided to kill it off properly, by proposing to convert all remaining CMTs to CMAs.

The downsides appear to be limited. The functionality of the CMA as compared to the CMT, if they act as your base bank account, will be almost identical. But because the CMA does not have to pay the government levy in the same way the CMT does, the returns will be higher. As at earlier this week, the CMA is paying a 4% return, while the CMT average is 2.64%.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.