As an SMSF trustee, one of the key functions of your management and control responsibility is to determine and facilitate the SMSF’s investment strategy. The initial impact and consequent aftermath of COVID’s upheaval to market conditions cannot be ignored when revising your fund’s SMSF asset allocation against your investment strategy, with many now questioning how to best rebalance their portfolios.
If you’re one of the many SMSF trustees unsure of what the unprecedented disruption of COVID means for your super fund, keep reading as we unpack how to approach diversification of your SMSF portfolio into the future, post COVID-19.
What impact has COVID-19 had on asset classes?
Fluctuations in performance across different asset classes are entirely expected and are indeed what provides the foundation for portfolio structure and strategy. However, COVID-19 really shook the market across all asset classes. The disruption that COVID-19 has brought with it spans across every aspect of life, therefore creating a strong ripple effect into the financial services sector for a multitude of reasons.
The rebound in the equities market has brought relief to portfolio balances; however, with the cash rate at an all-time low and a large disparity amongst asset class performance, it’s safe to say that COVID’s impact on asset classes has been significant. The ongoing impacts to asset classes are likely to be prolonged periods of volatility and returns being produced that truly challenge the assumptions of traditional asset allocation.
What should an SMSF trustee consider when rebalancing a fund portfolio?
Given that the fund’s investment strategy is the mandate for portfolio construction, it is prudent that an SMSF trustee always refers back to the original strategy. Particularly given the social impacts that COVID has caused, there is the potential that the fund’s objectives, goals, and priorities may have changed – so ensuring the investment strategy aligns with the fund’s overall objective should be a starting point. And by ensuring it aligns with the strategy, you’ll be adhering to the super laws regulated by the Australian Taxation Office (ATO).
Thereafter, ensuring that the fund’s assets are diversified through a robust and meaningful asset allocation as well as regular portfolio rebalancing would be a smart move for SMSF trustees. A consideration is always to be mindful of a healthy balance between risk control and cost minimisation. Rebalancing a portfolio too frequently can mean additional cost, missed dividends and takes away the opportunity to capture capital appreciation.
What asset allocation should a self-managed super fund have after COVID-19?
Like all things in finance, there is no one-size-fits-all approach to asset allocation in SMSFs. Your asset allocation depends on your balance, objective, age, life stage, risk appetite and number of fund members, among other factors. Market research has indicated that many SMSF trustees responded to COVID’s disruption to the market by leaning towards a more defensive allocation by increasing their exposure to cash and property – such as the residential or commercial properties that SMSF Loan Experts assist in funding!
Obviously, there is more to diversification than just increasing your asset allocation away from turbulent asset classes. By having sufficient liquidity, strategically allocating your assets, achieving a healthy balance across all asset classes and considering the tax implications of your investments, your fund has the best chance of potentially mitigating some of the risks that come with heightened market stress. This includes being able to diversify across geography and sector, as well as the style of investment (such as income orientated or growth-orientated funds or stocks). Seeking personal financial advice to obtain an objective opinion and professional advice can put your SMSF in good stead for a stable financial future.
SMSF Loan Experts are here to help you strike the right balance of diversification by leveraging your property investment opportunities. Contact us today to find out more about SMSF loans.