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Has the Challenger share price bottomed out?

The Challenger Ltd (ASX: CGF) share price is currently trading at $7.46 per share having plummeted 21% lower since the start of the year.

So, what has caused the Challenger share price to tumble in 2019 and is it time to buy Challenger shares on the cheap?

Why the Challenger share price has fallen in 2019

The Challenger share price had a soft end to 2018 largely due to booking significant losses on its investment portfolio as volatility in global markets hurt the wealth manager’s 2H 2018 returns.

The bad news continued for shareholders in January this year as Challenger announced a profit warning in mid-January, slashing its pre-tax profit guidance to between $545 million and $565 million, compared to $547.3 million booked in FY18.

While this might not look too bad on the surface, it followed Challenger’s bullish outlook in November 2018 which forecast pre-tax profit growth of 8% to 12%, and investors headed for the exit.

This was compounded by Challenger announcing a 97% drop in first-half net profit after tax for 1H 2019, and it’s easy to see why the Challenger share price has struggled so far this year.

What’s the outlook like for 2020?

Fast forward to August, and the Challenger share price surged 10% in one day as the Aussie annuity provider reported a 1% increase in assets under management to $81.8 billion and a net profit of $308 million.

Positively, Challenger still has a strong balance sheet despite its investment return woes in the past 12 to 18 months but I’m not sure the Challenger share price has reached its turning point just yet.

While the obvious upside for Challenger is the potential growth of the Aussie superannuation system and the trillions of dollars of assets on offer, there are potential headwinds too.

Challenger’s annuities business is dominant in the sector but could soon face increased competition and subsequent margin compression, further lowering investment returns.

Another challenge I see is that the low-interest-rate environment in 2019 and 2020 is also not conducive to fixed income sales, with investors looking for higher yields.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. 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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