[The Auditors Institute Ltd]

Hello Dipak

I am aware of the ATO writing to trustees of funds that have more than 90% of assets in the one class (usually real estate) and reminding the trustees of the requirement for the investment strategy to have considered diversification.

Without wanting to be critical of the ATO, the letters I am familiar with have a tense tone and could give the reader the impression that an investment strategy that has 90% or more of investable funds in the one asset is somehow in automatic breach of the SIS Act or the SIS Regulations.

This is not necessarily the case.  I would not be automatically concluding there is a breach of Regulation 4.09.

SIS Regulation 4.09:

(1)  This regulation:
(a)  is made for subsection   31(1) of the Act; and
(b)  applies to a superannuation entity that is a self managed superannuation fund.

(2)  The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
(a)  the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;
(b)  the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification [emphasis added]
(c)  the liquidity of the entity’s investments, having regard to its expected cash flow requirements;
(d)  the ability of the entity to discharge its existing and prospective liabilities;
(e)  whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

(3)  An investment strategy is taken to be in accordance with subregulation (2) even if it provides for a specified beneficiary or class of beneficiaries to give directions to the trustee where the directions:
(a)  relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the entity; and
(b)  are given in the circumstances covered by regulation   4.02.

As we see from the bolded text (above), the requirement is not that an investment strategy must embrace diversification, but rather that when formulating the investment strategy regard is given to  “the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification”

As a fund auditor, our role is to ensure that an investment strategy is in place and that the trustee of the fund has adhered to the strategy.

I appreciate that this type of question often arises and is the cause of some discussion in the super professionals community.  I welcome the observations of other auditors on this mater.

Best regards

The Auditors Institute