Managed crypto exposure in a SMSF

by | Dec 16, 2022

As the first new asset class in a century and a half, digital assets have captured a huge amount of interest from a broad range of investors including SMSFs.

Much of the media coverage has focused on the large fluctuations in the Bitcoin price, or the collapses of some digital assets, but at its heart, digital assets are just like any other asset class: there are winners and losers on the Nasdaq, strong macro forces will impact the market but most importantly they offer diversification.

While many view Superannuation as a vehicle for a more conservative investment approach the best results are achieved via strong diversification, adding small allocations of high volatility assets to a conservative portfolio can actually lower portfolio volatility due to the effect of diversification.

Digital assets are only in their infancy of use and carry huge longer-term growth potential. Investors who appreciate this are taking what is one of the few opportunities that has become available in decades to enter an emerging asset class ahead of institutional investors, who ordinarily get to front run individual investors.

Many people contemplating investing in digital assets will use a personal account, but for Australia’s army of 1.1 million self-managed superannuation fund (SMSF) members – spread across more than 600,000 funds – it will make sense to use their SMSF.

Allocating to digital assets via superannuation enables investors to:

  • Align a long-term investment horizon with a long duration asset
  • Take advantage of favourable tax treatment for a high growth-oriented investment
  • Support a more disciplined approach to portfolio construction, setting a target allocation and sticking to it. 

But this is not as simple as investing on personal account, for reasons that spring from superannuation law.

Under the superannuation “sole purpose test”, the trustees of a SMSF must ensure that the fund is maintained for the sole purpose of providing retirement benefits to members. That is not the only legal requirement: the rules that govern SMSFs are rigorous. When the fund is established, the trustees must formulate and implement an investment strategy for the fund, which outlines the fund’s investment objectives and specifies the types of investments it can make.

This strategy considers factors such as liquidity; matching cash flows to liabilities in the pension phase; risk; and diversification. In considering risk, the fund has to look at the members’ ages, when they plan to retire and then match its portfolio to those factors.

If a SMSF wishes to invest in digital assets, the investment (like any other) must:

  • Be allowed under the fund’s trust deed;
  • Accordance with the fund’s investment strategy; and
  • Comply with the same regulatory requirements as apply to other investments – as set out in the Superannuation Industry (Supervision) Act (SISA) and Superannuation Industry (Supervision Regulations (SISR).

What are institutional investors doing with respect to the asset class? Fidelity recently surveyed over 1,000 institutional investors, 81% of respondents are either currently or planning to allocate to the sector, legendary investor like Dalio, Miller, Tudor Jones and Druckenmiller all believe digital assets should form a part (2-5%) of a well-balanced portfolio.

The issue then is how best to allocate to digital assets? Direct via a crypto exchange, of which there are several reputable and local options, these give you full control of asset selection but also full control of custody; via an ETF which makes custody easier to manage but doesn’t offer diversification; or through an actively managed unit trust.

We believe an actively managed unit trust is the best approach, particularly for SMSFs as it allows:

  • Trustees to effectively set and forget their exposure, leveraging blockchain investment professionals to monitor the rapidly evolving sector and its large alpha opportunities
  • Access to institutional grade custody, taking away the headache of managing private keys
  • The benefit of a staking yield, we target 4-6%
  • Avoid single asset risk via a diversified basket of the best digital assets
  • Avoid complex year-end tax reporting with a single monthly unit price
  • and leverage other traditional risk management techniques of a professional manager 

Through a smart and secure locally domiciled unit trust, an investor does not need to trade or try to “time the market,” and can apply the principle of “time in the market” and the compounding of long-term returns to make this emerging asset class work for them in the most effective way possible.