Fund's value rises when Castro ails
Updated 6h 57m ago
A CASTRO PLAY?
How the Herzfeld Caribbean Fund (CUBA) has reacted to news of Fidel
Castro's health during the past 12 months:
Key dates and events:
July 31, 2006: Castro delegates duties to his brother Raul Castro.
Dec. 2: Misses 50th anniversary of Granma boat landing and events
marking beginning of the Cuban revolution.
Dec. 17: Cuba says Castro will return to duties.
Dec. 26: Surgeon says Castro doesn't have cancer.
Jan. 16, 2007: Spanish newspapers say Castro is in "very grave" condition.
Jan. 30: Photos show Castro meeting with Venezuelan President Hugo Chávez.
Feb. 27: Castro reported improving.
May 1: Misses May Day parade.
Source: Yahoo Finance
By John Waggoner, USA TODAY
Some stocks — and the mutual funds that own them — rise and fall in
response to earnings or new-product announcements. Then there's the
Herzfeld Caribbean Basin fund (ticker: CUBA). It tends to gain and drop
according to the health of Cuban leader Fidel Castro.
On Tuesday, when Castro failed to make an appearance at May Day
celebrations in Havana, the Herzfeld fund soared 11.8%. This closed-end
fund, which trades on the Nasdaq exchange just as stocks do, invests in
stocks that stand to gain once the USA lifts its trade embargo against Cuba.
The fund's share price has been tightly correlated with Castro's health
for the past year, rising when news reports have indicated that the
Cuban leader is gravely ill and falling when there are signs of his
recovery. Castro temporarily stepped down as president on July 31 after
emergency surgery, naming his brother, Raul, as acting president. The
fund's share price leaped 12.8% the next day.
Castro met with President Hugo Chávez of Venezuela on Jan. 30. From that
point until early this week, the fund plunged 21% on speculation that
Castro had recovered.
FIND MORE STORIES IN: Reuters | Cuban | Fidel Castro | May Day
Thomas Herzfeld, the fund's manager, started the fund in 1994, figuring
that the U.S. trade embargo, which began in February 1962, would
eventually end. "The vast majority of stocks we invest in should do well
when trade resumes with Cuba," he says.
One example: Trailer Bridge (TRBR), which puts trucks on ships and
delivers them from Florida to Puerto Rico. The company has shallow-draft
vessels, which would work well in Cuba. Cuba has only three deep-water
ports, Herzfeld says.
Another example: Florida East Coast Industries (FLA), a railroad company
whose rail lines could enjoy substantially improved business if the
Cuban trade embargo ended.
Of course, there are no guarantees that the U.S. trade embargo will end
with Castro's death. His brother, Raul, the effective leader of the
country, has made few changes. But some Cuba experts think Raul Castro
would encourage a more open trade policy once Fidel Castro dies. Despite
his illness, Fidel Castro's presence is still being felt, says Brian
Latell, former Latin America analyst for the CIA and author of After Fidel.
"Raul is anxious to make substantial changes to the management of the
Cuban economy but feels constrained to do that as long as Fidel is alive
and aware," Latell says.
The USA will be looking for progress in several areas before it ends the
embargo, Herzfeld says, including a restoration of human rights and,
possibly, compensation to U.S. citizens for property seized by the Cuban
government. "No one single event could more lead to the end of the
embargo than the passing of Fidel Castro," Herzfeld says.
The Herzfeld Caribbean Basin fund has gained a sizzling 158% in the past
three years, vs. 34% for the Standard & Poor's 500-stock index. But
before you place any bets on Castro's death, be aware: This fund isn't
Closed-end funds issue a set number of shares. And their market price
often doesn't reflect the current value of their portfolio. For example,
the Herzfeld Caribbean fund's share price is now 26.2% higher than the
value of the stocks it owns. In other words, it sells at a premium to
its holdings. If the fund were to sell all its holdings and distribute
them to shareholders, the shareholders would receive far less money per
share than the current share price would indicate.
Most experts, including Herzfeld himself, advocate buying closed-end
funds when their market value is less than the value of the securities
they own, a situation that's called a discount. For example, the Mexico
fund (MXF), which Herzfeld's fund owns, sells for a 13.6% discount to
the value of its holdings. If that fund were to liquidate today,
shareholders would receive an immediate profit.