Cuba Fund Up On Castro Death Watch
Ken Hoover Thu Aug 3, 7:00 PM ET
Shares of Herzfeld Caribbean Basin Fund hit an all-time high this week,
and no wonder. As one of the few public vehicles for betting on regime
change in Cuba, the prospect of
Fidel Castro’s demise has generated excitement.
The closed-end mutual fund (NASDAQ:CUBA – News), run by Thomas Herzfeld,
began trading May 20, 1994, with a net asset value of 5.20. The
significance of the date and price is that May 20 is Cuban Independence
Day. The fund ended Thursday at 8.22, up 15.3% for the week after
trading as high as 9.50.
“It has a history of going up when there’s news from Cuba, especially
when it centers on Castro’s health,” Herzfeld said.
It’s illegal for Americans to invest or trade with Cuba, except in areas
like medicines and food, which Herzfeld says he’s avoided. Instead, he
invests in U.S. and Latin American companies he thinks will benefit if
the U.S. embargo is lifted, an event likely only if the Communist
“One cannot live in south Florida as I have for the past 30 years
without being immersed in Cuban-American culture,” said Herzfeld, a
transplanted New Yorker who lives in Miami.
Herzfeld is a closed-end fund specialist. Like other mutual funds,
closed-end funds start with a pool of investors’ money. But you can’t
redeem shares or add money to closed-end funds, as you can with a
traditional open-end fund. So, the manager doesn’t have to sell stock or
put new cash to work to accommodate investor inflows and outflows.
Instead, closed-end funds trade like stocks based on supply and demand.
Most closed-end funds trade at a discount to their net asset value
(NAV), and occasionally at a premium. The NAV is the value of its
holdings, minus fees. The $13 million Herzfeld fund has often sold at a
discount. At Wednesday’s close, it traded at a 16% premium to its NAV.
Not Freedom Dependent
Herzfeld’s strategy is to find companies that will not only benefit from
trade with Cuba but also prosper without it. Much of his portfolio is in
construction, transportation and cruise lines that have been successful
plays the past few years. Emerging markets, especially in Latin America,
have done well.
That’s why the fund is up 203% since bottoming in March 2003 at 2.71.
It’s up 3.5% year to date.
The Caribbean Basin fund’s biggest holding is Florida East Coast
Industries (NYSE:FLA – News), which runs a railroad from Miami to
Jacksonville. The company’s new CEO is Cuban-American Adolfo Henriques.
Herzfeld says the company plans a barge service from Cuba to its
railroad if the embargo is lifted.
Heating and air-conditioning provider Watsco (NYSE:WSO – News),
Consolidated Water (NASDAQ:CWCO – News), which provides water in
Caribbean countries, and Florida Rock (NYSE:FRK – News), which provides
construction aggregates, are other top holdings along with Royal
Caribbean Cruises (NYSE:RCL – News).
More than half the assets are in U.S. companies. A recent portfolio
addition is Copa Holdings (NYSE:CPA – News), a Panama-based airline that
makes daily flights to Havana.
Herzfeld has also been researching claims by companies whose property
has been seized by the Castro government.
Just under 6,000 claims valued at $1.8 billion have been certified by
the U.S. Foreign Claims Settlement Commission. Accumulated interest over
46 years brings that to $20 billion, Herzfeld told shareholders in a
letter in February.
He believes the U.S. government will require compensation on some
fraction of that before trade with a new government begins.
So he’s invested in Cuban Electric, a rarely traded Pink Sheets stock.
It was the Cuban national electric utility until its property was seized
in the revolution. Herzfeld said it has about $18 million in U.S. banks.
With 3.6 million shares outstanding, that amounts to $5 a share. He
bought at 8. It last traded Tuesday at 12.50.
Herzfeld said the company, which is inactive, has $267 million in claims
against Cuba, not including interest, or $74 a share.
Years ago, the fund bought $165,000 in Republic of Cuba, 4.5%, 1977
bonds at 30 cents on the dollar.
The bonds are in default, but could be worth more if the embargo is lifted.
Any change in Cuba after Castro’s death is likely to be slow, said
Lorenzo Perez, a Cuban-born economist for the
International Monetary Fund. His successors are likely to lack his
charisma and reputation.
That could be different if a new government puts in place laws
respecting contracts and property rights.
“Then, everything would be open for business,” Perez said.