Challenger (ASX:CGF) share price is up 35% in 6 months. Can it continue its form in 2021?

Challenger (ASX: CGF) share price has had a solid run in the last 6 months, rising by 35%. So what’s ahead for the investment manager in 2021?
The post Challenger (ASX:CGF) share price is up 35% in 6 months. Can it continue its form in 2021? appeared first on The Motley Fool Australia. –

A sign saying stay tuned, indicating a share price announcement expected on the ASX

The Challenger Ltd (ASX: CGF) share price has had a solid run in the last 6 months, rising by 35%. This comes after the investment manager lost almost a third of its value in March, when the Challenger share price fell by as much as 65%.

Let’s take a look at the company’s prospects and the challenges it may face this year.

First, what’s been driving the Challenger share price?

Challenger has two main businesses – the annuities business through Challenger Life, and funds management business consisting of Fidante Partners and Challenger Investment Partners.

Challenger Life’s sales amount to roughly 90% of yearly annuity sales in Australia, while its investment fund products are represented on platforms used by more than 70% of Australia’s financial advisors.

The Challenger share price has staged a significant comeback in the second-half of 2020, since plummeting to its 52-week low of $2.82 in March.

In its update for the quarter ending September 2020, the company revealed that assets under management (AUM) for its annuity business increased 4% for the quarter to $89 billion.

In the latest earnings update announced last week, the company also reported that it expected normalised net profit after tax (NPAT) to be within its guidance range of $390 million to $440 million.

Challenges and tailwinds in 2021

The company is still recovering from the disruption to its financial advisor distribution channel due to the Financial Services Royal Commission, historic low interest rates, as well as COVID-19 impacts.

The annuity business in particular, has seen massive pressure from low interest rates, which are likely to stay low for the foreseeable future. Low interest rates normally discourage investors from buying into annuities.

It also faces continuing market risk management challenges in the annuity business. The annuities portfolio has an inherent mismatch risk in that its liabilities are fixed, while its investments are subject to volatile market movements such as the one we saw in 2020. This could impair its obligations to pay to annuitants, considering returns are guaranteed.

However, a strong tailwind might be coming its way in the form a regulatory change. 

The Australian Government is in the process of formulating the comprehensive income product for retirement (CIPR) laws, which will require super fund trustees to develop a retirement product with a stable and regular income stream. This will come into law on 1 July 2022, and will bode well for Challenger’s annuities business.

The company has also said that its focus in 2021 is to capture an increasing portion of the $70 billion in funds shifting into the Australian post-retirement segment each year.

To achieve this, the company said it will focus on expanding its distribution channels that were less scathed by the Royal Commission; such as independent advisors, specialty platforms, as well as expanding overseas.

As an example, it has partnered with MS Primary to sell AUD-denominated and USD-denominated annuities into Japan.

About the Challenger share price

As mentioned, the Challenger share price has gained 35% over the last 6 months, but is down 25% for the year. 

The direction of its share price heading into 2021 may depend on how well it can manage its portfolio through the volatile market. And whether it can execute its expansion platform to reach more investors.

The Challenger share price was down 2.93% at $6.29 at close of trade today.

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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Challenger (ASX:CGF) share price is up 35% in 6 months. Can it continue its form in 2021? appeared first on The Motley Fool Australia.

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