Craig Manchuck on the Schwab Network: The Shifting Fixed Income Landscape

Tom White: Welcome back to Opening Bell, let's bring in our next guest and joining me now is Craig Manchuck, portfolio manager for the Osterweis Strategy Income Strategy Strategic Income Strategy. I wanted to get your take here on the equity markets before we start talking private credit because it seems like there's no cracks as far as the equity market goes and the optimism that's out there at this point. Give me your take here on what you're seeing here in the equity market and is it warranted at this point?

Craig Manchuck: Most of what we're seeing in the equity markets is being driven by AI right now. That's obviously the most popular topic on everybody's mind. If you look underneath the surface, I think returns are much more diffuse and probably not seeing really strong positive returns away from things like the chip stocks and power names, which are peripherals to the AI regime right now.

Tom White: Craig, when you take a look at probably the downturn that we've saw in private credit, maybe since the start of the year, it was the big investment opportunity throughout 2024, 2025, but we're starting to see a few cracks in this market at this point. What's your outlook here? Was it too much money chasing maybe too little growth, or not enough growth at this point? Why do you see cracks here in the private credit market at this point?

Craig Manchuck: I think it was a combination of factors. Anytime you see meteoric asset growth and asset collection, you're liable to have people make investment mistakes. I've seen it happen over the years in the hedge fund industry where funds grow really, really rapidly and it always negatively impacts returns. In the private credit space, we saw it happen in a couple of places. There's one fund in particular that grew from a billion dollars to $33 billion in five years. It's just too hard to get yourself invested in a responsible way. So the asset growth is part of it.

I think the other side of it is really the way that the industry has collected assets. So the institutional side of the industry collects assets in a fund strategy in which they call on those assets as they find investments to put to work. And the retail side it's a different story, because as that money comes into the funds, they have to get invested immediately. It's not on a call in basis. So that really accelerates the need for the private credit guys to put money to work faster, and I think ultimately that's really where the investment mistakes are made.

Overall, I think the industry is probably going to be okay, but it's gotten much more competitive. Returns will be muted and I think over time they'll probably converge a lot with what you're able to find in the public markets from a fixed income perspective.

Tom White: Yeah. And we've had some commentary from Jamie Dimon and others and saying that there might be some roaches out there in this space. Craig, is it maybe your opinion that there's too much money chasing this market at this point and that lends into gains in the equity market also? There's just that wealth effect that's going on right now in risk on assets right now and private credits right in the cross hairs, right?

Craig Manchuck: Yeah. That's where the money has come in and that's where people have gotten very creative. Creative not necessarily in a good way. One of the things that you see a lot of in private credit are a lot more PIK loans. Look, the private credit guys have really been around for a long time, but what's happened is as banks have been regulated out of the highly levered lending business, the private credit guys have stepped in, filled the gaps, and they've been able to do some things and lent to some businesses that are not really financeable in the public market. So it makes sense for that market to exist, it's just it's not always going to be perfect. And anytime you're looking at higher expected returns, that's got to come with a higher expected level of risk. There's no free lunch out there.

So I think that's part of what we see going on out there. And the survivors I think will be fine, but the banks are now back in the game. The regulatory rules that were put in place to limit the amount of financing that banks were able to do to highly levered businesses, those have gone away. So now once the banks get back into the game, I think it'll be even harder for the private credit guys to distinguish themselves. So I expect we'll see consolidation where some of the weaker players get absorbed by some of the stronger ones. The strong will survive, but I think returns will be much more difficult to come by because it's just a lot more competitive and there is a lot of money chasing deals.

Tom White: Yeah. What type of approach are you guys taking at Osterweis as far as this potential, the cracks showing up here in private credit?

Craig Manchuck: We're defensive by nature, and the way we're positioned right now is towards our most defensive. We've had a very, very strong run in credit here for quite a long time. Spreads are tight, but for us the most important driver really are absolute yields. We think that the high yield market is still attractive because the absolute yields are closer to a level where historically returns are pretty, pretty solid. So having said that, we find a lot of value at the very front end of the curve because we haven't been able to find hugely significant differentiated yields as we go further out on the curve. So between the one and two year tenor, we're able to find some things that make a lot of sense to us where we're clipping nice yields but not taking too much risk.

And I think based on where the equity market is, based on where the credit markets are, this is not the time to be putting the pedal to the metal and going all-in on risk. We've got to preserve capital, wait for opportunities to present themselves. We see idiosyncratic opportunities are popping up here and there and we're swift to move onto those, but just trying to make sure we stay out of trouble and don't do anything stupid at this point in the cycle.

Tom White: Yeah. Be patient, not a bad theme here at this point, especially with the short end of the curve. All right, great discussion. That's Craig Manchuck, portfolio manager for the Osterweis Strategic Income strategy. Thanks for bringing us that information.