Challenger Financial Limited (ASX: CGF) has defined the annuities market in Australia, and appears to be one of the few businesses on the ASX that is exposed to enduring (multi-decade) structural tailwinds. We consider it to be one of the highest quality companies on the ASX. This view is also supported by a recent market survey.
Consider these points in light of Challenger’s business model:
- At the latest half year result, Challenger’s CEO said; “Retail annuity sales have continued to grow strongly yet we’re only four years into the 20 year retirement phase of Australia’s 4 million plus Baby Boomers. As the wealthiest generation in history, the boomers have a lot to lose, so place a very high value on capital preservation.”
- Assets in retirement are projected to quadruple in this decade alone. This basically means that as more and more boomers retire, the level of assets which Challenger services is expected to grow by a factor of four.
There is currently $66 billion transitioning out of the wealth accumulation phase and into the decumulation (retirement) phase in Australia every year. If industry forecasts are right, within 10 years this will grow to in excess of $200 billion, a compound annual growth rate (CAGR) of approximately 13 per cent.
How many markets in Australia can you point to that will grow by this magnitude over the coming decade, with very few negative outliers? Very few I bet.
- Of the current pool of funds flowing into the retirement phase, just 4 per cent is directed to annuities. If the Australian market follows the trend of more mature decumulation markets overseas, this will likely triple to between 10 and 15 per cent of funds.
- Regulators and financial planners have more recently demonstrated a willingness to accelerate growth in annuity adoption. One such regulatory tailwind comes from David Murray’s Financial System Inquiry, which points to the Government looking seriously at incentivising retirees to purchase larger and larger amounts of their wealth as long-term income streams.
And so we come to our final point.
In terms of Australia’s largest financial product distribution force, financial planners, a recent survey conducted by Investment Trends clearly shows that annuity recommendations are on the rise:
- “The number of financial advisers recommending annuities to their clients has increased to 38 per cent in 2014, up from 32 per cent in the previous year.”
- “In addition to already increasing usage, the intention to use annuities has also increased with 59 per cent of planners intending to recommend annuity products in the coming year, up from 45 per cent saying so in the previous study”.
- “Among planners who recommended income guaranteed products in the last 12 months the vast majority, 86 per cent, used a Challenger product.”
Challenger has gone through a bumpy six months for reasons that we have previously mentioned here. Business growth is rarely smooth, but for this business, we are willing to bet that the next decade should be smoother than most.
The Montgomery [Private] Fund and The Montgomery Fund is a shareholder of Challenger Financial Limited (CGF).