Challenger Ltd (CGF) $7.58

Financial services provider CGF rallied +4.41% yesterday after the company reaffirmed guidance, in our opinion a sign of how little confidence the market had in the company meeting their numbers. This once-market darling is still trading  47% below its 2018 high, not a  great result considering the ASX200 has rallied more than +20% over the same time, and that’s before we even consider dividends. However, the new high-interest rate environment suits CGF, it’s currently enjoying arguably the best trading conditions in 10 years! While this is a complex business in simple terms CGF can pass on to customers the higher interest rates it’s earning which in turn makes its products far more appealing.

• CGF’s 3-year annuity offering has jumped from just above 2% to a fresh decade high of 5%, all in less than 12 months.

Understandably advisors are jumping on the bandwagon again with CGF’s annuity sales up 41% in the December half with retail sales surging an astounding +89% i.e. finally the retiree can earn some interest. Importantly the 2^nd half is also looking rosy as retail investors are reinvesting close to 70% of the time when previous terms expire. The main drag on the stock on Tuesday probably came from the fund’s management business where the result was on the light side – but it’s less important.

• In our opinion after the volatility in financial markets through COVID and the resulting ultra-low interest rate environment a 5% return for 3 years looks very appealing – the disposable “grey dollar” is one area of discretionary spending on the up!

However, in line with our neutral view towards interest rates, we are reticent to chase CGF into multi-month highs although we do like their product appeal at least over the next 12 months. It’s also critical when assessing CGF as an investment to consider whether we believe the assets it buys to deliver the new 5% annuity, including property and corporate debt, will fare during a rough recession – in this case, MM would rather select our investments directly as opposed to 2^nd hand.