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Challenger Ltd (ASX:CGF) share price down 3% on update, is it a buy?

The Challenger Ltd (ASX: CGF) share price is currently down 2.6% after giving investors a presentation at its 2018 investor day.

A lot of the presentation focused on the changes to the retirement phase that the government is making.

The new rules will take effect on 1 July 2019. It is hoped that the Department of Social Services changes will deliver and simplicity, although the new rules are fairly similar to old rules.

One of the most important things for Challenger is that a superannuation trustee is required to develop a member retirement income strategy. Challenger is the market-leader in annuities, so it looks as though it will be the clear winner from this.

Challenger said that for its investment portfolio it would be increasing the allocation to fixed income and decreasing the allocation to property. It said that the relative attractiveness of holding property over fixed income has reduced. Fixed income is less capital intensive than property according to Challenger, which should mean that the return on equity is improved.

One new piece of information to come out of the presentation is that Challenger will be expanding into the active exchange-traded fund (ETF) market. It is planning to launch Australia’s first active fixed income ETFs.

This could be a good move, there is a growing demand for ETFs because of how easy it is to invest in them and the diversification they offer. This should mean more management fees for Challenger over time. The ETFs will be launched in the first half of FY19.

Foolish takeaway

Challenger re-iterated that ‘normalised’ net profit before tax growth will be 8% to 12%, subject to market conditions. It’s currently trading at 17x FY19’s estimated earnings. This is more expensive than Challenger has been in the past, however compared to many other growth shares I think this is a very attractive price for a 10-year investment.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. 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 Scott Phillips.

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