There are a whole range of shares outside of the ASX20, which I think offer far better investment opportunities over big companies like BHP Billiton Limited (ASX: BHP), Telstra Corporation Ltd (ASX: TLS) and Australia and New Zealand Banking Group (ASX: ANZ).
I think one of the best options that could still be classed as a blue chip is Challenger Ltd (ASX: CGF). It is predominantly an investment managing firm.
Challenger aims to help its clients with financial security for retirement. In the accumulation phase of life Challenger helps build wealth. In the spending phase of retirement Challenger helps convert this wealth into a safe and reliable income stream through an annuity.
The best way to compare finance stocks, other than comparing quantitative statistics, is to look at the drivers for future earnings.
Commonwealth Bank of Australia (ASX: CBA) relies on population growth, economic strength of clients and the housing market. BT Investment Management Ltd (ASX: BTT) relies on capital inflows, mainly from superannuation and the UK.
Challenger's main client base is the retiree population of Australia, who are looking for a secure source of income from their capital. The Australian retiree population is expected to increase by 75% over the next twenty years thanks to the baby boomers reaching their golden years.
The growth of Challenger's client base is already flowing through to the results. In FY17 group assets under management (AUM) grew by 17% to $70 billion, annuity sales grew by 20%, lifetime sales grew by 70%, normalised earnings per share grew by 6% and the dividend grew by 6%. Any finance business would be happy with this set of numbers.
Challenger revealed its first quarter update to 30 September 2017 a couple of months ago, the numbers were equally as impressive. Group AUM was up 5% to $73.5 billion, total life sales up 45% on the prior corresponding period and annuity sales were up 6%.
The mandatory 9.5% superannuation contribution for employees and tax incentives for business owners who add their own contributions should see the superannuation pool grow substantially over the coming years. Superannuation assets are expected to double to more than $4 trillion over the next decade.
Foolish takeaway
Challenger is currently trading at 21x FY18's estimated earnings with a grossed-up dividend yield of 3.46%. Challenger has had a good run this year, so I wouldn't describe it as cheap. However, I'd rather buy Challenger shares at today's price than most other shares in the ASX100.
