The Dry Powder Gang, 2025

By David Snowball

“Put your belief in God, my boys, and maintain your powder dry!”

Recommendation attributed to Oliver Cromwell, within the poem “Oliver’s Recommendation” (1834)

Listed below are three easy truths:

1. Proudly owning shares is smart as a result of, over the long term, returns on shares far outstrip returns on different liquid, publicly accessible asset lessons. Over the previous 90 years, massive cap shares have returned 10% a yr whereas authorities bonds have made 5-6%.

   	S&P 500 (inc. dividends)	US small cap	3-month T-bill (aka money)	10 yr Treasury bond	Baa company bond	Actual Property	Gold
   1928-2024	9.94%	11.70	3.31	4.50	6.62	4.23	5.12
   96-year portfolio	$13.9 M	$75.4 M	$23,700	$75,230	$554,000	$56,000	$132,000

   See? So long as your retirement is a minimum of 96 years off, it’s foolish to place your cash wherever apart from frequent shares. For these of us with a time horizon shorter than 96 years, although, there’s a second reality to deal with.

2. Proudly owning shares doesn’t all the time make sense as a result of the worth of upper long-term returns is larger fast volatility. That’s as a result of shares are extra thrilling than bonds. Frankly, no regular human ever mentioned, “Yup, I received me some 30-year Ginnie Mae jumbos with a coupon of three.5%” with practically the identical visceral delight as “yup, I received into Google on the IPO.” Maaaagic! That want to personal magic typically sufficient leads traders to spend a whole lot of {dollars} to purchase shares which might be incomes simply pennies a yr. Excellent news results in pleasure, pleasure results in a want to personal extra, that want results in a bidding warfare for shares, which results in a hovering inventory worth, which results in extra bidding … and, ultimately, a head-first tumble right into a black gap.

   Younger traders, inured to flash crashes and three-month bear markets, won’t instantly acknowledge how deep that gap might be. Right here’s a reminder.

   Most drawdown and restoration instances, 1960-2025

   Lipper Class	APR (%)	MAXDD (%)	Restoration Time months
   World Multi-Cap Development	11	-76.6	233
   Multi-Cap Core	8.2	-65.1	141
   Small-Cap Core	10.3	-56.6	125
   Mid-Cap Development	9.8	-60.3	114
   World Giant-Cap Core	8.4	-54.9	74
   Multi-Cap Development	10.3	-51.2	73
   World Multi-Cap Worth	11.3	-56.7	71
   Multi-Cap Worth	9.8	-53.8	71
   Giant-Cap Core	10.3	-52.5	70

   Supply: MFOPremium.com fund screener, Lipper World Datafeed

   How do you learn that chart? First, the excellent news: in the event you had invested within the common international multi-cap development fund and held it since 1960, you’ll have earned 11% per yr in your funding. Should you had held it. The problem to holding all that point is that you’d have suffered one catastrophic drawdown through which you misplaced 76.6% of your portfolio … and also you didn’t absolutely get better for nineteen-and-a-half years. Even the supposed joyful place – the extremely liquid firms of the S&P 500 – has value its traders 52.5% at one fell swoop and left them underwater for simply wanting six years.

3. Traders can be extra rewarded for warning than boldness simply now. As of March 2025, Warren Buffett’s Berkshire Hathaway holds a file $334 billion in money, which represents roughly 29% of its complete belongings. That is the very best proportion of money relative to complete belongings that Berkshire has maintained in a long time, surpassing even earlier excessive ranges, such because the late 2000s earlier than the monetary disaster.

   Why would possibly that be?

   • by some measures, the market stays considerably overpriced (its 10-year CAPE p/e ratio has been hovering, even after the latest correction, on the second-highest stage in 125 years);
   • the returns on Treasury bonds and payments are substantial and more likely to stay so, which creates actual competitors for the inventory market and depresses returns;
   • market analysis companies just like the Leuthold Group warn, “The message of the market appears more and more recessionary” with “the job market on the brink” (3/9/2025) with Mark Zandi of Moody’s putting the chances of a recession this yr at 40% (3/31/2025) and Goldman Sachs estimating 35% (3/31/2025);
   • the federal government, which already pays $1 trillion/yr in curiosity on the nationwide debt, might want to refinance $9 trillion in Treasury bonds in 2025 (Invenomic Capital Mgt, 3/2025) at charges typically larger than the present bonds, which provides to each the debt and political turmoil; and,
   • each Mr. Trump’s tariffs (which the Wall Road Journal’s editorial board decry as a $6 trillion tax (3/31/2025)) and their chaotic, impulsive, and ill-considered launch, pause, reconfiguration, and relaunch, set off fears of a world recession and reordering of alliances which may marginalize the US. You’ll seemingly have heard about, or quickly will, the CRINK nations – China, Russia, Iran, and North Korea – which type a free anti-US alliance, each within the markets (China holds $700 billion in Treasury bonds) and in our on-line world.

The Secretary of the Treasury has opined that “I’m not apprehensive concerning the markets”(3/17/2025). Others are, which is mirrored in multi-year lows in shopper confidence and a $5 trillion drop within the inventory market over three weeks from late February to mid-March. That drop occurred earlier than any precise financial results of tariffs have been seen, apparently reflecting deepening anxiousness amongst traders.

It’s totally doable {that a} bear market triggered this yr would possibly proceed to hang-out portfolios till the early 2030s. That’s not a prediction; that’s a threat issue to have in mind in your portfolio design.

One affordable conclusion, in the event you settle for the arguments above, is that you need to depend on inventory managers who should not wedded to shares. After we enter a interval when proudly owning shares makes much less sense, then your supervisor must be free to … nicely, personal much less inventory. There are a minimum of 3 ways of doing that: making bets that the market or explicit sectors or securities will fall (lengthy/quick fairness), shifting belongings from overvalued asset lessons to undervalued ones (versatile portfolios) or promoting shares as they change into overvalued and holding the proceeds in money till shares change into undervalued once more (absolute worth investing). Any of the three methods can work, although the primary two are typically costly and sophisticated.

So why are lengthy/quick and versatile portfolios vastly extra common with traders than simple absolute worth investing? Two causes:

1. They’re attractive. It’s virtually like being invested in a hedge fund which, regardless of outrageous bills, illiquidity, frequent closures, and deplorable efficiency, is the place all of the Cool Youngsters hang around.
2. You demand managers that do one thing! (Even when it’s one thing silly). Batters who swing on the first pitch, and each pitch thereafter, are thrilling. They could go down, however they go down in glory. Batters who look forward to a fats pitch, watching balls and marginal strikes go by, are boring. They could get stable hits, however followers change into impatient and start screaming, “we’re not paying you to face there, swing!” Because the season goes on, batters really feel the strain to supply and find yourself swinging at increasingly dangerous pitches.

In The Dry Powder Gang, Revisited (Could 2016), we concluded:

being absolutely invested in shares on a regular basis is a dangerous thought. Permitting greed and concern, alternately, to set your market publicity is a worse thought. Believing that you simply, personally, are magically immune from these first two observations is the worst thought of all.

You need to put money into shares solely whenever you’ll be richly repaid for the astronomical volatility you could be uncovered to. Timing out and in of “the market” is, for many of us, far much less dependable and much much less rewarding than discovering a supervisor who’s disciplined and who’s prepared to sacrifice belongings fairly than sacrifice you. The half-dozen groups listed above have demonstrated that they deserve your consideration, particularly now.

In mild of this, we recognized the small handful of funds that appear notably compelling simply now: funds with a monitor file of success and the “dry powder,” or money readily available, to pursue extra.

How we screened funds

Our highest conviction suggestions are typically drawn from the ranks of the Nice Owl funds. These are funds which have produced high quintile risk-adjusted returns (i.e., they beat a minimum of 80% of the friends in risk-adjusted returns) over the previous 3-, 5-, 10- and 20-year intervals (i.e., they get it proper constantly). To that display, we added a requirement that the parents at present maintain substantial dry powder: money or short-term bonds that may buffer a portfolio in a nasty market and supply liquidity to seize bargains after they lastly current themselves.

In every case, we in contrast every fund’s five-year file with that of its Lipper peer group. Wherever a fund outperformed its friends, we coloured the corresponding cell blue. We offer the fund’s five-year annual returns, adopted by two threat measures – its most drawdown or loss prior to now 5 years and its efficiency in bear market months – adopted by information on the fund’s money, dimension, age, and bills.

You’ll notice that the bills are typically larger than common (with FPA Crescent being a distinguished exception) each as a result of these funds are, on common, small and the group expense common tends to be depressed by massive funds charged between zero (in Constancy’s case) and 5 – 6 foundation factors (within the case of my largest passive funds and ETFs).

5-year file, Nice Owl Funds with substantial dry powder

		Annual returns	Max drawdown	Bear market dev.	Dry powder	AUM ($M)	Age	E.R.
FPA Crescent (FPACX)	Versatile Portfolio	11.8	-17.0	9.3	13%	10.8B	31.7	1.05
Class Common	Versatile Portfolio	7.3	-19.3	7.7				1.22
Horizon Kinetics World (WWWEX)	World Small- / Mid-Cap	22.5	-22.7	9.9	28	62.8	25.2	1.39
Horizon Kinetics Small Cap Alternatives (KSCOX)	World Small- / Mid-Cap	29.1	-29.6	15.8	14	568	24.9	1.64
Class Common	World Small- / Mid-Cap	10.0	-34.4	13.3				1.18
Marshfield Concentrated Alternative (MRFOX)	Multi-Cap Development	16.8	-10.6	6.7	26	1,110	9.2	1.02
Class Common	Multi-Cap Development	14.0	-37.0	12.8				0.90
Towpath Focus (TOWFX)	Multi-Cap Worth	17.1	-14.3	7.5	16	45.5	5.2	1.12
Class Common	Multi-Cap Worth	13.3	-19.6	11.0				0.68
PIMCO RAE PLUS EMG (PEFIX)	Rising Markets	10.7	-28.9	13.5	n/a	182	16.3	1.45
Class Common	Rising Markets	4.4	-35.8	11				0.87
PIMCO StocksPLUS Worldwide (US Greenback-Hedged) (PISIX)	Worldwide Multi-Cap Core	13.0	-16.9	9.3	n/a	3,232	21.3	1.17
Class Common	Worldwide Multi-Cap Core	8.0	-28.2	10.3				0.68

Supply: MFOPremium.com fund screener, Lipper World Datafeed

The unusual and great case of money at PIMCO

The PIMCO funds are fairly good and customarily fairly good in danger administration. Their money / dry powder is flagged as “n/a” or “not relevant” right here as a result of the methods use a bunch of hedging methods that make them report big money piles, plus being greater than 100% in bonds plus proudly owning shares.

Funds one step down

The edge for the Nice Owl group is extremely difficult: on the high, on a regular basis. By definition, Nice Owls have five-star MFO rankings. A handful of different cash-rich funds that didn’t fairly attain the Nice Owl threshold even have highly effective points of interest. Highlights of that record observe.

5-year file, MFO five-star funds with substantial dry powder

		Annual returns	Max drawdown	Bear market dev.	Dry powder	AUM ($M)	Age	E.R.
Leuthold Core ETF	Versatile Portfolio	8.9%	-12.8	5.6	18	76.4	5.1	0.84
Class Common	Versatile Portfolio	7.3	-19.3	7.7				1.22
Pinnacle Worth	Small-cap Worth	12.4	-15.3	8.5	36	34	22	1.33
Class common	Small-cap Worth	13.3	-27.0	14.9				0.85
Schwartz Centered Worth	Multi-Cap Development	24.9	-20.7	12.2	15.2	75.8	32	1.26
Class Common	Multi-Cap Development	14.0	-37.0	12.8				0.90

Backside line

The demand for a completely invested portfolio forces managers to purchase shares they don’t need to personal. For many funds, money sits at 1%, even when the managers have to squint laborious to justify what they’re shopping for. Judged by affordable measures (risk-adjusted returns) over affordable intervals, you might be higher served by portfolios with out fillers and by the kinds of managers we characterised because the “we’ve received your again” guys. Go verify them out. The clock is ticking, and also you actually don’t do your finest work within the midst of a panic.