Challenger Ltd (ASX: CGF) shares are down around 3% today, extending the 2026 year-to-date share price decline to 14% after the company reported a third-quarter update.
While the company's latest update showed pockets of strength, investors seemed to be more focused on the decline in funds under management.
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Decline in funds under management
Challenger reported that funds under management fell 10% over the quarter to $104.5 billion, driven largely by net outflows of about $8 billion. That's not just a reflection of a decline in broader equity markets; it largely reflects institutional investors pulling capital out, mainly from equity strategies.
Given that the business earns fees based on assets under management, sustained outflows place downward pressure on earnings. They point to weaker future earnings and raise questions about competitiveness. In simple terms, this is the part of the business that benefits from scale but equally suffers when funds under management decline.
Strong annuity growth
On the other side of the business, things are going well. Challenger's annuity division continues to perform strongly, with total Life sales up 19% to $1.7 billion. Demand for retirement income products remains robust, particularly as ageing populations in Australia and Japan seek stable income streams.
The issue is that this part of the business is capital-intensive and balance-sheet heavy. It generates earnings, but not in the same scalable, high-margin way as funds management. So when funds management weakens, it tends to dominate investor sentiment.
There are also signs the business is in transition. Challenger plans to redeem its Capital Notes 3 in May 2026, following regulatory approval. While this reflects a solid capital position, it also signals a shift in how the company is managing its balance sheet.
At the same time, the broader environment isn't helping. Challenger pointed to negative market movements, ongoing global volatility, and a continued shift away from active equity strategies. These are structural headwinds for its funds management arm and help explain why assets are falling.
Foolish bottom line
Put it all together, Challenger's core retirement business is holding up, but the engine that drives scalable growth is under pressure. Whilst it's been a tough start to 2026, Challenger shares are up 19% over the past 12 months and 62% over the past 5 years.
