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Many SMSF trustees see the annual investment strategy review as a compliance obligation. A form gets updated and signed, and the document sits in a folder until next year.

The ATO’s position is increasingly that this is not enough. More importantly, this is not in the interests of the trustees themselves either.

With a right analytical framework, the investment strategy review can become one of the most valuable exercises an SMSF trustee undertakes each year. Here is how to approach it as a data-driven portfolio insight, rather than an annual burden on the trustee.

1. Check the portfolio-strategy match

The Superannuation Industry (Supervision) Act 1993 requires trustees to consider the risk, return, diversification, liquidity, and the ability to meet liabilities when formulating and giving effect to an investment strategy. This means the portfolio must reflect the strategy, not just reference it.

The first analytical question is therefore: does my current portfolio match what my strategy document says? If the strategy specifies a target allocation of 60% Australian equities and 40% international and income assets, what does the portfolio hold today? Asset prices drift between rebalances, so a strategy that was accurate twelve months ago may no longer be accurate now.

2. Measure the real diversification

Trustees commonly describe their portfolio as diversified because it holds ten or fifteen different stocks, but the holdings count is the least useful measure of diversification.

Consider a portfolio of twelve ASX-listed stocks spread across banking, mining, and energy. Those three sectors are all highly sensitive to domestic economic conditions, commodity prices, and interest rate movements.

A portfolio may hold many stocks but some of them could be exposed to similar risks.

A more useful measurement is the pairwise correlation between portfolio holdings. Correlation indicates how portfolio holdings move together – in bull markets but especially in bear markets when the risk of loss comes into play. If most pairs of stocks in the portfolio have correlations above 0.5, the portfolio is concentrated regardless of how many holdings it contains. Professionals recommend having holdings that are not correlated at all (correlation close to 0) or are negatively correlated (correlation is negative).

Various tools usually provide a view of correlations as a colour-coded matrix, where red and dark red indicates high correlations between holdings.

A related good metric to consider is the Diversification Ratio, calculated as the weighted average of individual holdings volatilities, divided by portfolio volatility. A value of 1 or lower means that there is no diversification benefit in the portfolio, and investors should aim for a diversification ratio as high as possible.

3. Evaluate the risk-adjusted return, not just the return

Trustees often assess their portfolio by comparing its raw return to the ASX 200 or another index. This comparison is incomplete without accounting for the risk taken to generate that return. Other indicators help with that understanding, for example:

The Sharpe ratio (calculated as the portfolio’s excess return above the risk-free rate, divided by its annualised volatility) measures how much return is being generated per unit of risk. Two portfolios that both returned 12% in a year are not equivalent if one achieved that return with an annualised volatility of 15% and the other with 28%. The latter exposed the investor to much more risk of loss during the year.

Similarly, a portfolio’s beta (its sensitivity to the broader market) tells trustees how much portfolio return may fluctuate when the market moves. E.g., a portfolio with a beta of 1.25 will tend to rise 1.25% for every 1% the market rises and fall 1.25% for every 1% the market falls. Understanding this sensitivity is relevant to the fund’s risk objectives and the members’ time horizons.

4. Stress test the portfolio against a drawdown scenario

The investment strategy review is also an appropriate moment to consider how the portfolio would behave under adverse conditions. A straightforward stress test can be constructed using each holding’s beta.

For example, if the ASX 200 were to fall 20%, each holding’s estimated loss can be approximated as its beta multiplied by 20% and weighted by its weight in the portfolio. A portfolio whose weighted average beta is 1.1 would be expected to fall approximately 22% under that scenario (or $220,000 on a $1 million fund).

5. Document the analysis

The final step is practical. Auditors are looking for evidence that trustees have considered various factors and made informed decisions. A portfolio analysis document that includes a correlation matrix, a performance analysis and a stress test output provide that evidence. If you don’t know how to run all those calculations yourself, technology and portfolio analysis tools can help.

The annual review, approached this way, becomes something more useful than a compliance exercise. It becomes a monitoring ally, so the trustee knows at any time whether the portfolio is still doing what the strategy says it should.

This article is for educational and informational purposes only. It does not constitute financial advice or a recommendation to acquire or dispose of any financial product. SMSF trustees should seek advice from a licensed financial adviser regarding their specific circumstances.

By: Laura Rusu | August 8, 2026 | smsfadviser.com