Shares in annuities and funds manager Challenger Ltd (ASX: CGF) are up 3% to $12.90 in morning trade after the group released a positive trading update for the quarter ending September 3o, 2017.
The dominant market position and tailwinds supporting Challenger's annuity business are no secret and today the group reported annuity-related sales (via its Life division) up 57% over the prior corresponding period.
The Life division will remain the dominant earnings driver ahead, which is good thing given its opportunity to grow if Challenger is able to effectively manage its balance sheet risk.
Challenger aims to generate returns on its investments across multi-asset classes such as money market instruments, longer dated debt, and equity investments above the total annuity payment commitments it must meet to its customers.
As such some of its investments are funneled into the funds management businesses it also runs to help meet its liabilities and it is the growth of these funds management businesses that impressed this quarter.
In fact when I wrote 3 reasons I'd buy Challenger shares last week it was slightly remiss of me to not cover Challenger's growing funds management business, particularly as its growth is a highlight of today's update.
Its two principal asset management businesses of Fidante Partners and Challenger Investment Partners manage both equities and coupon returning debt and managed to grow funds under management 5% to $73.5 billion over the quarter.
In total the funds management business booked net inflows of $3.8 billion over the quarter and its growth as a lower risk business model than the Life business is positive. It also helps diversify risk and provides a convenient segway for the group to manage its balance sheet risk via fixed income asset investments.
The Life business for example requires more capital backing as its liabilities grow and is challenged by the search for risk-adjusted investments able to deliver returns above the income streams it must payout to annuity holders.
So far, Challenger has managed this delicate balancing act well and recently raised $500 million from Japanese life insurance and annuities partner Mitsui Sumitomo, with a commitment to invest substantially more funds from Mitsui.
Today, management reconfirmed guidance for normalised profit growth of 8%-12% over FY 2018 with a robust outlook for the years ahead given its dominant market position and Australia's mandated superannuation system.
Outlook
As I suggested last week the stock looks to offer a good mix of growth, value, and income selling for $12.49. Although it has climbed higher to $12.90 today, I expect it still offers solid total returns over a 3 to 5-year timeframe ahead.
