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Why the Challenger Ltd share price is going nuts today

Credit: GotCredit

Shares in annuities provider Challenger Ltd (ASX: CGF) have climbed more than 11% this morning after the group announced two new annuity distribution deals with financial planning giant AMP Limited (ASX: AMP) and Japanese operator Mitsui Sumitomo.

The group has been firing on all cylinders thanks to its dominant market position across the fast-growing annuities market that provides fixed income returns to retirement age investors over defined periods or in perpetuity in exchange for lump sum upfront payments.

Given the mass of property rich and cashed-up baby boomers reaching retirement age it’s no surprise annuity sales and Challenger’s share price have been on a strong upward trajectory.

For the quarter ending September 30 2016 the group posted annuity sales of $1.03 billion, up 46% on the prior corresponding period, with lifetime annuity sales more than tripling over the course of just one year. Moreover, the growth of Australia’s government mandated superannuation sector is also only set to balloon as compulsory contribution rates are lifted far beyond 9.5% and retirees seek longevity protection.

Many people in retirement prefer the certainty of paltry but fixed returns over exposure to the short-term volatility of the share market, which is no surprise given the peace of mind it may provide and the fact that bad memories of the GFC still burn bright for many Baby Boomers. Today’s low cash rate world also encourages retirees to seek out investment options as an alternative cash.

However, it’s no secret that a lot of annuity products offer shoddy returns that are inferior to plenty of other asset classes and the general public’s blindness to the substantial downside to annuity products is partly what has helped sales and distribution focused businesses like Challenger deliver strong growth.

Over the long term Challenger is likely to keep performing well thanks to its dominant market position and I expect the shares may offer far better value than the annuities at current prices.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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