Show download pdf controls
  • Our August letter to SMSF trustees ‘Does your SMSF investment strategy meet diversification requirements?’

    At the end of August we contacted about 17,700 self-managed super funds (SMSF) and their auditors where 2018 SMSF annual return data indicated these SMSFs may be holding 90% or more of their retirement savings in one asset or a single asset class. The SMSFs contacted also used a limited recourse borrowing arrangement (LRBA) to acquire the single asset or asset class. In 99% of the SMSFs contacted, the asset in question was property.

    While nearly a third (180,000) of the total population of SMSFs have invested 90% or more of their retirement savings in a single asset or asset class, those SMSFs contacted were selected based on a report to government in February by the Council of Financial RegulatorsExternal Link and the ATO. The ‘Leverage and Risk in the Superannuation SystemExternal Link’ report highlighted concerns that less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price could lead to a significant loss in the value of the fund.

    We were concerned that these SMSF trustees may not have given due consideration to diversifying their fund’s investments and the risks associated with a lack of diversification when formulating and reviewing their investment strategy.

    While a trustee can choose to invest 90% or more of their retirement savings in a single asset or asset class, concentration risk combined with leveraged borrowings, can expose the SMSF and its members to unnecessary risk if a significant investment fails.

    We asked trustees to review their investment strategy and clearly document the reasons behind the investment decisions.

    We also asked trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements.

    See also:

    Keep up to date:

      Last modified: 18 Sep 2019QC 60131