Ask an SMSF trustee to describe the equity side of their portfolio and the answer is usually specific. Company names. Entry prices. Franking credits. A view on the sector and a reason for holding it.
Ask the same trustee to describe the defensive side and the answer is often a single word. Cash.
That asymmetry is not carelessness. Growth assets attract commentary, generate performance stories and invite opinion. Defensive assets rarely do. They tend to be described as the part of the portfolio that sits still, which is precisely why they receive the least scrutiny in an annual review.
The result can be a blind spot. For some SMSFs, the defensive allocation may have developed gradually rather than through a specific allocation decision. It may be a residual, money that was not deployed elsewhere, parked somewhere convenient and left there through several changes in market conditions.
A structured review does not require a trustee to change anything. It requires them to be able to answer questions about what they hold and why. The seven questions below are framed for that purpose.
Why the Defensive Allocation is Worth a Formal Look
Regulation 4.09 of the Superannuation Industry (Supervision) Regulations requires trustees to formulate, regularly review and give effect to an investment strategy, having regard to risk and return, diversification, liquidity, the fund’s ability to discharge its liabilities, and whether to hold insurance for members.
Two of those five, liquidity and the ability to discharge liabilities, are questions the defensive allocation is most often called on to answer. The regulation does not prescribe a review frequency, though the ATO has indicated it expects trustees to review the strategy at least annually and to keep evidence that the review occurred.
For a fund in retirement phase, the stakes are more practical than regulatory. The defensive allocation is often the part of the portfolio that funds drawdowns. Its structure can influence whether a trustee is able to hold growth assets through a period of weakness rather than sell into one.
The Seven Questions
1. What is this allocation actually for?
Defensive holdings can serve several different purposes. A liquidity buffer for near term obligations. A source of income. A dampener on portfolio volatility. A store of capital stability. These purposes are not interchangeable, and a holding built for one may sit awkwardly against another.
Many trustees have never written the purpose down. Starting here changes the character of every question that follows, because a holding can only be assessed against the job it was brought in to do.
2. What actually sits inside the label?
The defensive allocation is not one asset class. It may include cash and term deposits, government bonds, investment-grade corporate credit, sub-investment-grade credit, hybrid securities and private credit.These behave differently from one another. They respond to different drivers, carry different risks and are exposed to different points in an economic cycle.
A portfolio described as “40 per cent defensive” tells a trustee very little on its own. A portfolio described by what sits inside that 40 per cent tells them a great deal more.
3. Which risks am I holding, and am I being compensated for them?
Fixed income exposures generally carry some combination of credit risk, interest rate or duration risk, liquidity risk and structural complexity. None of these are inherently problems. They are the reasons a return exists at all.
The question is not whether risk is present. It is whether the trustee can name which risks they hold, in what proportion, and whether the return on offer reflects them. A yield that stands well above comparable alternatives is usually explained by something. Understanding that explanation is part of the review.
4. Where does the money come from?
For any credit exposure, this resolves to a short chain of questions. Who is the borrower. What are they using the capital for. What security sits behind the loan. What happens if repayment does not occur on the terms agreed.
Trustees apply this thinking naturally to direct property, where the tenant, the lease and the building are all visible. The same thinking is available for credit exposures, and asking for it is reasonable.
5. Does the liquidity profile match the fund’s obligations?
An SMSF has obligations with dates attached. Minimum pension payments for members in retirement phase. Tax. Insurance premiums. Occasionally a lumpy expense such as a property outgoing.
The review question is whether the defensive allocation can meet those obligations as they fall due, without a forced sale elsewhere in the portfolio. Some fixed income exposures offer daily access. Others have fixed terms, notice periods or redemption windows. Neither structure is a flaw. A mismatch between the structure and the fund’s cash needs is a different matter.
6. Do my holdings behave differently from one another?
Diversification is a statement about behaviour, not about the number of line items. Several holdings can carry different names, different managers and different product structures while sharing the same underlying driver.
A useful test is to describe, for each defensive holding, the conditions under which it would come under pressure. If the answers cluster, the diversification may be narrower than the holdings list suggests.
7. Can I evidence that this review took place?
The final question is administrative rather than analytical, and it is the one most often left undone. A review that exists only as a conversation between trustees is difficult to demonstrate later.
What tends to hold up is a short record: what was considered, what the trustees concluded, and the reasoning behind any decision to retain or adjust an exposure. Evidence of a considered process is what an auditor is generally looking for.
What A Completed Review Looks Like
A trustee who has worked through these questions can describe their defensive allocation the way they already describe their equity holdings. What it is. Why it is there. What it is exposed to. When it can be accessed.
That is the standard the growth side of the portfolio is usually held to. The 2026 review is an opportunity to apply the same standard to the other half.
About Trivesta
Trivesta is an Australian wholesale funds management company. It provides professionally managed investment opportunities to eligible wholesale clients, which may include qualifying SMSF trustees and sophisticated investors.
Disclaimer: Issued by Trivesta Funds Pty Ltd ACN 627 270 900 (Trivesta Funds), a Corporate Authorised Representative (AR No. 1274820) of Trivesta Capital Ltd ACN 126 975 282, AFSL 320497 (Trivesta Capital). Trivesta Funds is authorised to provide financial services in connection with the Trivesta Protected Yield Fund (Fund). The information on this page is general only and does not take into account your objectives, financial situation or needs, and does not constitute legal, tax, financial or investment advice. The Fund is available only to wholesale clients (including sophisticated investors) under section 761G or 761GA of the Corporations Act 2001 (Cth). Offers to invest in the Fund will only be made via an Information Memorandum (IM) issued by Trivesta Funds. Investment is subject to risks, including capital loss, delays in repayment and loss of income. Past performance is not a reliable indicator of future performance. Returns, income and capital preservation are not guaranteed. Visit www.trivesta.com.au for further information.
