Why we continue to like Challenger
Challenger Financial Group (ASX:CGF) has over $60b in assets, commands the leading market position in annuities, and has a growth profile that should be supported by a rising tide of superannuation assets. We like the business – it’s one of Montgomery’s larger positions. Our views were confirmed this week, when Challenger presented its interim results.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Graeme
:
Following on from Warren’s comments, I recall years ago the large life offices had their own annuity products which they discontinued when the demand for such products decreased. One would think that it would be a fairly simple thing for any number of institutions to (re)introduce annuities in response to the increasing demand. I am not sure that sufficient consideration has been given to this possibility and the affects on Challenger’s earnings.
Roger Montgomery
:
Hi Graeme, We have given considerable thought to that possibility. The biggest threat comes from the four majors but the recent capital adequacy requirements imposed on them has caused them to pursue more ‘capital-efficient’ endeavours. Annuities are a capital intensive business, and if you also take a look at the market cap of Challenger (circa $7.3bn) versus, say CBA ($139bn) you have ask whether it would be worth their while pursuing it – it wouldn’t add much value even if they dominated. Hope that helps.
Kelvin Ng
:
Hi Roger, what do you think of JRP Group PLC, an annuities business listed in the UK? It may make a nice holding for your global funds.
Kelvin
Julian Watt
:
Skaffold rates it as C5. Which is not good. Does this mean Skaffold is not really that useful?
Roger Montgomery
:
Hi Julian,
The rating is a function of the level of debt. WHen you see this it is a trigger for you to investigate the debt. In Challenger’s case the debt represents liabilities to pension/annuity investors. These liabilities are however matched by assets (investments).
Warren M'am
:
Nice article, Roger. I’ve been following your posts on Challenger for a couple of years now, not convinced that they would remain unmolested by the big ‘incumbents’. Now that you’ve suggested that CIPRs are about to be introduced, it seems likely the banks will simply design new products and hit the marketing button to prevent the funds that they already hold in their own super funds from seeping away.
Unfortunately, I find myself in the boat where I need to have my SMSF funds handled as an annuity but “cannot afford or don’t trust advisers, feel completely unqualified, lost and alone”. (A little experience has left me wary of FAs.) And reading about the available products, make me feel none the wiser.
But great posts; I’ll keep reading and one day and light may shine …
Warren
jamie
:
Safety margin -38%
J
Roger Montgomery
:
Hi Jamie,
Everyone’s valuation will depend on the assumptions that drive the inputs into their IV formula. What are yours?
jamie
:
I note others rates CGF as poor quality and safety margin of -38%. Does this suggest they disagree with your analysis of CGF as a Quality value stock?
J
Roger Montgomery
:
Yes Jamie. That suggests a very different view however because this is a finance company and the liabilities (obligations to annuity holders) are matched entirely by assets (assets purchased to meet the agreed obligations to the annuity holders) we are comfortable that the quality is much higher than some suggest. Keep in mind this is a financial services firm that came through the GFC virtually unscathed and met all its liabilities.
Kelvin Ng
:
Well done Roger on your call on CGF. You and Andrew were among the first to be on to it, at a time when most fund managers were sceptical.
Kelvin