Posted August 08, 2006 by publisher in Cuba Business.
THOMAS J. HERZFELD was early to the party — very early.
In 1994, the closed-end fund guru based in Miami launched the Cuba Fund. Its aim was to provide a way to invest in the rebuilding of a free Cuba.
Later that year, it was renamed the Herzfeld Caribbean Basin Fund (CUBA: 8.21, 0.23, 2.9%). The fund trades on Nasdaq, and since its founding, its assets have grown to $14 million — not much, but not bad for an investment that, in essence, is a bet on a not-so-sure thing — that once Fidel Castro dies, his brand of hard-core communism will be kicked off the island, the U.S. will lift its longtime trade embargo against Havana and Herzfeld can convert his Cuba-related holdings into big gains.
Herzfeld’s ship may have come in — although Castro, who came to power in Cuba in 1959 and has ruled with an iron fist, hasn’t gone quite yet. But word last week of Castro’s hospitalization and intestinal surgery, not to mention rumors of his death, pushed up the value of the Caribbean Basin Fund’s shares overnight. (The illness, by the way, inspired some editor at the New York Daily News to pen a truly great headline: “Fidel Gastro.”)
On July 31, the shares traded at 7.05, a 6.6% discount to the fund’s underlying net asset value. The following day, when word of Castro’s illness surfaced, the shares closed at 7.95, a 5.4% premium. On Aug. 2, the shares jumped to a more than a 20% premium before ending up at 8.81, a 15.8% premium. (Unlike open-end funds, closed-ends have a fixed number of shares that trade on an exchange. They can be bought or sold throughout the trading day, with their shares trading in relation to their perceived net asset value.)
“When we selected the portfolio, we knew there was no way to time when the [trade] embargo with Cuba would be lifted,” Herzfeld says.
While Cuba has, by and large, a state-run economy, it has opened up joint-investment ventures to certain foreign countries, including Spain, in sectors such as tourism. But pure-play investments there aren’t prevalent, and the embargo prevents Americans from investing there directly.
Herzfeld’s fund is hardly a pure play on Cuba. It has plenty of exposure to Mexico, with such holdings as Cemex (CX: 28.80, -0.20, -0.7%), Telefonos de Mexico (TMX: 24.35, -0.44, -1.8%) and Am�rica M�vil (AMX: 35.94, -0.15, -0.4%), and to U.S. companies, several in Puerto Rico. Other countries where it invests include Panama, Colombia, Belize and the Cayman Islands.
Herzfeld has invested in U.S. companies that he maintains would benefit if Cuba opens up to U.S. investment. One is Florida East Coast Industries (FLA: 51.36, 0.19, 0.4%), which has real-estate and railroad holdings, including a freight line whose business would likely increase from trade between Cuba and the U.S. He also holds Royal Caribbean (RCL: 34.56, -0.14, -0.4%) and Carnival (CCL: 38.13, 0.17, 0.5%), cruise lines that could get a boost from an opening of the Cuban economy.
In terms of direct investment in Cuba, the fund does hold $165,000 of sovereign debt, now in default, issued in the pre-Castro era. Herzfeld is betting that if Cuba does liberalize its economy, the government will agree to repay a portion of that debt, which was due in 1977.
A similar bet is Cuban Electric, a thinly traded U.S. firm no longer in operation whose investors filed thousands of claims against the Cuban government after it seized the company’s assets. Herzfeld maintains those claims are worth $74 a share, excluding interest. Whether the Cuban government will ever make good on the claims is uncertain, although Herzfeld thinks Washington would demand they be addressed before lifting the embargo.
Over the years, even as Cuba has shown no sign of changing its leadership and economy, the fund has made money for its shareholders. As of Aug. 2, the closing share price of 8.81 represented a 102% gain since inception, adjusted for distributions. The net asset value, also adjusted for distributions, was up 86%.
But predicting geopolitics is dicey.
And any liberalization of the Cuban economy is “more than likely to be a gradual process, but it all depends on how things unfold,” says Robbert Van Batenburg, head of Global Research at Louis Capital Markets in New York.
Bill Rocco, an analyst at Morningstar who follows international funds, doesn’t know of any other funds besides Caribbean Basin with as much of a Cuban focus. (Herzfeld has filed an application to launch another fund, this one with holdings even more concentrated on Cuba.)
Emerging-market funds with a Latin American focus, Rocco says, are mostly a play on Brazil and Mexico, with countries like Chile and Peru at the margins. “The Caribbean is generally not what they are concerned about,” he says. And if Cuba does open to foreign investment, “We’re not talking about the development of China here by any stretch of the imagination,” he adds. Cuba’s proximity to the U.S. could make for a powerful economic combination, Rocco says, “But the Caribbean as a whole is not really a big place.”
Herzfeld, however, senses plenty of opportunities. “It will take billions of dollars just to rebuild the infrastructure” in Cuba, he says.
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