Why has the share dropped., page-90

Moving back to the topic of Challenger’s fixed income portfolio, here is the most detailed and recent breakdown I have been able to find (from the 2018 Analyst pack).

It does not give the name of the issuer of each individual security, but the breakdown by sector and credit rating can be useful to identify possible areas of weakness.



As highlighted, one conceivable reason for concern (as we are discussing all possible risks) is the fact that there is 2.9bn$ of RMBS/CMBS in the portfolio, whose asset backing is directly influenced by property prices.

Therefore, the property market risk run by the Company is not limited to the 3.1bn$ of direct property investments (77% of which is Australian office and retail space). The aggregate of direct investments and RMBS/CMBS adds up to 6.0bn$, which represents 33% of the total Life Investment Portfolio.

Having said that, I think it is important to highlight the following:

a) The relative weight of RMBS (Residential Mortgage Backed Securities) vastly outweighs the one of CMBS (Commercial Mortgage Backed Securities) in the portfolio. This is important, because residential mortgages have on average longer tenors than commercial mortgages, and also are generally amortising; therefore, the debt securities backed by these mortgages carry less refinancing risk, hence less exposure to the underlying property prices.

b) Challenger used to be Australia’s largest non-bank securities of RMBS, via their Mortgage Management business sold in 2009 (see reference in the table below).
Therefore, it seems reasonable to assume that RMBS risk (and ABS risk in general) is not taken on lightly, and that the associated portfolio construction is done with a grain of salt.