It hasn't been a particularly great year for shareholders of annuity provider Challenger Ltd (ASX: CGF) with the share price falling around 7% in the past 12 months.
That's worse than the one-year return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which has gained nearly 2.5% and certainly worse than many of Challenger's peer group, such as AMP Limited (ASX: AMP) which is up over 15% and IOOF Holdings Limited (ASX: IFL) which has gained around 27%.
Despite the recent lacklustre performance there are reasons to look favourably on Challenger's future. Here are some of the positives:
With an increasing number of Australians moving into the retirement phase of their life, securing an income to cover essential living costs is of the utmost importance. Annuities – which are a core product for Challenger – offer a solution to retirees and self-managed superannuation fund (SMSF) trustees by providing an income that remains for the whole of an account holder's life.
Annuities have obvious appeal within the superannuation system and Challenger is the leading provider of these products. To date, annuities have for the most part remained a marginal product however they are increasingly becoming mainstream thanks to Challenger's marketing and education to investors of the benefit of annuities.
Investor access to investment products on 'platforms' is vitally important. The increasing availability of Challenger's annuity products on platforms is a critical development. Platform representation will shortly expand substantially when Challenger launches on the Commonwealth Bank of Australia (ASX: CBA)-owned Colonial First State FirstChoice platform.
But there are also negatives
Despite the annuity business offering exposure to an enticing thematic, there are reasons to be cautious about buying shares in Challenger.
Analysing and developing a knowledgeable understanding of the risks and liabilities in the annuities business is a necessary task but arguably it is beyond the capabilities of many investors.
Accurately evaluating a business should be a key step in any investment process but unfortunately valuing Challenger's business is complex and may be best off relegated to the 'too hard' basket.
As Buffett has famously counselled investors, staying within your 'circle of competence' can lead to better investment returns in the long term.
