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HavanaJournal.com: Cuba Business

Miami adviser pursues dream of Cuba investment fund

Posted April 08, 2003 by publisher in Cuba Business.
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YUKA HAYASHI | Associated Press

NEW YORK - Thomas Herzfeld, a Miami investment adviser, is so enamored by the prospect the eventual lifting of the Cuban trade embargo could bring to American investors that he’s been trying for nearly 10 years to get a Cuban investment fund approved.

Just last week, his company filed a registration with the Securities and Exchange Commission for a closed-end fund called Cuba Fund Inc. - his fourth attempt since 1994.

Currently, U.S. investors aren’t permitted to invest directly in Cuba because of the Cuban Assets Control Regulations issued in 1963 under the Trading With the Enemy Act.

Herzfeld said he couldn’t say much about the Cuba fund because of the “quiet” period restrictions during the fund’s registration process. But he acknowledges that the purpose of the fund is to invest in “post-embargo” Cuba, rather than investing “indirectly” now in Canadian or European companies that already do business in the country.

“I believe we are coming close to the end of the embargo with Cuba,” said Herzfeld, who runs Thomas J. Herzfeld Advisors Inc., an investment advisery and brokerage firm handling $300 million in closed-end fund assets for investors.

According to the filing, Cuba Fund initially will invest at least 80 percent of its assets in securities issued by foreign companies doing business in the country in areas such as agriculture and communications. If and when the 43-year-old embargo is lifted, the fund will invest directly in companies that are “strategically linked to Cuba, including those domiciled in Cuba.”

Although his Cuba fund has yet to see the sunlight, Herzfeld is no stranger to Cuba-related investment. Indeed, Herzfeld Advisors already runs a $5.7-million closed-end fund called Herzfeld Caribbean Basin Fund, which trades on the Nasdaq exchange under the ticker symbol CUBA.

Closed-end funds are diversified investment funds sold to both individual and institutional investors. Unlike mutual funds, they are bought and sold like individual securities on stock exchanges. There are a number of closed-end funds that invest in single emerging market countries such as India and Mexico.

Herzfeld describes the 9-year-old fund as a “regional fund with a Cuba kicker.” According to the fund’s 2002 annual report, roughly half of its assets are invested in companies from the Caribbean region, such as Mexico, the Cayman Islands and Panama. U.S. companies with ties to the region, including several companies Herzfeld believes will benefit from the potential lifting of the Cuban embargo, make up the rest of the portfolio.

Herzfeld, 58 years old, says he has become fascinated with the Cuban culture and socioeconomic phenomenon surrounding the trade embargo as he has lived in Miami for decades with close proximity to the Cuban exile community.

These people have helped him become convinced of the impact the potential lifting of the embargo would have on U.S. investors. “Cuba was the powerhouse of the Caribbean before the embargo, and 80 percent of its trade was with the U.S.,” he says.

Another thing he learned from the Cuban exiles is the existence of the Cuban sovereign bond, issued by the Republic of Cuba before President Fidel Castro took power in 1959. The Caribbean Basin Fund paid $63,000 in the late 1990s to purchase the defaulted debt issued in 1936 and matured in 1977, which has a face value of $165,000 plus over $50,000 in unpaid coupon.

Herzfeld says many Cuban exiles brought the bond with them when they left the country and still own it. Since these are the people who might one day help run the Cuban government, Herzfeld reasons, there is a chance that the debt might be paid back.

No value is assigned to the bond in the Caribbean Basin fund’s portfolio currently.

The bond is not the only Cuban play in the portfolio. The fund allocates roughly 4 percent of its assets each to Carnival Corp. and Royal Caribbean Cruises Ltd. on the belief that once restrictions are lifted, millions of American tourists would visit Cuba on cruise ships operated by these companies. Florida East Coast Industries Inc., which operates freight services between Miami and Jacksonville, Fla., is the fund’s top holding, accounting for 23 percent of the assets.

But so far, the Cuban kicker in the portfolio hasn’t done enough to reward the fund’s investors. According to Closed-End Fund Association data, the fund lost an average of 7.3 percent in each of the past five years based on its market price.

The fund doesn’t invest in companies outside of the Caribbean region that do business with Cuba, such as Canadian resort operator Leisure Canada Inc.

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