Challenger Ltd (ASX: CGF) is one of my favourite shares out of all of my holdings.
A financial management company might not seem like a market-beater when there are so many others on the market like AMP Limited (ASX: AMP), BT Investment Management Ltd (ASX: BTT) and Macquarie Group Ltd (ASX: MQG).
I think the key to Challenger's success is its dominant position in the annuity space. By being the leader in annuities I think the following reasons make it a really good investment:
Growth of the superannuation pool
Australia has one of the world's most envied pension systems. People may have a few complaints about how it's set up or recent changes, but overall it's a big positive for Australia.
Having a system where 9.5% of wage earnings are put towards retirement is a good thing for the individual and other stakeholders.
According to Deloitte it's estimated that Australia's total superannuation assets will reach more than $4 trillion by 2027 and $10 trillion by 2037.
Challenger benefits from this growth when the individual reaches retirement and then they want to turn their capital into a guaranteed source of income.
Ageing population
The age bracket that uses Challenger's services the most are people reaching retirement age. The best definition of this would be people who are aged 65 and over.
The projections are for the number of over-65s to increase by 75% over the next two decades. The baby boomer cohort retiring will be a big boost to Challenger over the coming years.
Japanese growth
Challenger has recently linked up with MS&AD Insurance Group in Japan to provide 20-year fixed-rate annuities.
This isn't Challenger's main focus, but it could be a good part of earnings over the coming years because of how large the Japanese market is. Japan has very low interest rates, so Australia seems attractive in comparison.
Foolish takeaway
Challenger is currently trading at 20x FY18's estimated earnings with a grossed-up dividend yield of 3.68%.
I think Challenger is a very good long-term buy at the current price and I'm looking to buy more if the price dips below $11 again.
