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HavanaJournal.com: Cuba Business

Annual Report - Herzfeld Caribbean Basin Fund - CUBA

Posted February 29, 2012 by publisher in Cuba Business.
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Rob Sequin | Havana Journal

The Herzfeld Caribbean Basin Fund has released its Semi-Annual Report dated December 31, 2011.

While I am not a financial analyst, I thought it would be interesting to highlight some of the investments and language from the Report for our Havana Journal readers.

This is a closed end fund that trades like a stock on the NASDAQ with the stock symbol CUBA.

The fund’s investment objective is long-term capital appreciation. According to the Report “To achieve its objective, the Fund invests in issuers that are likely, in the Advisor’s view, to benefit from economic, political, structural and technological developments in the countries in the Caribbean Basin, which include, among others, Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia, the United States and Venezuela (“Caribbean Basin Countries”).”

Herzfeld invests in “Caribbean Basin” related businesses but it does not have the stock symbol CUBA for no reason. The shares seem to trade in the $6 to $7 range but there is usually a pop in the price when there is big news in the US about Cuba and usually when there is big news in Cuba. Even though there have been many economic changes, the fund has not increased in value much over the past couple years.

Investment Strategy and Outlook

The Fund seeks long-term capital appreciation through investment in companies which the Advisor believes are poised to benefit from economic, political, structural and technological developments in countries of the Caribbean Basin. More specifically, our investment strategy, since inception, has focused on Caribbean Basin companies that would benefit from the resumption of U.S. trade with Cuba.

Since it is impossible to predict when the U.S. embargo against that country may be lifted, we have concentrated on investments which we believe can do well even if there is no political or economic change with respect to that country.

Our early investments were primarily in large companies with strong earnings and balance sheets. These include global organizations which have the potential to do business in Cuba, and which currently have varying exposures to that country. This strategy has worked well over the years; original shareholders in the fund have more than doubled their money.

Recent developments indicate to us that the prospect of resumption of trade with Cuba is just beyond the horizon. Fidel Castro’s age and health are certainly factors and the upcoming visit by Pope Benedict this March is highly significant. We cannot help but notice the changing attitudes of Americans towards Cuba.

Going forward, as opportunities arise, we will seek to modify our investment approach to include some speculative holdings using a more highly focused Cuba strategy. Initially, this will be done only with a small portion of the portfolio. We accept that these new portfolio companies may currently have weak balance sheets and/or no current earnings in exchange for their future potential.

Changing Environment

2011 may best be remembered as being the year the U.S. lost its AAA credit rating or for the escalation of Europe’s economic woes. But in the background, a great deal of change happened with regard to Cuba. The country made unprecedented positive moves in the direction of capitalism. By far the most interesting developments, in our opinion, were the decisions to allow Cubans to start businesses and grow companies.

Cuba now permits farmers to sell directly to state-run hotels and other tourist facilities; before they were required to go through government channels to reach those markets. Cuba has also begun to allow small businesses to hire workers and even get loans from banks to start new ventures. Before, business had to operate secretly in the black market and away from official eyes. Now, appliance repair stores, carpentry shops, and locksmiths are springing up throughout Cuba.

Further evidence of change includes allowing Cubans to buy and sell their homes as well as vehicles, albeit with restrictions.

On the U.S. side, licenses were granted to five additional American airports to fly directly to the island, and Cuban-Americans are no longer restricted in the number of times they can visit—before only one trip was allowed every (three) years. For the first time, Cuban-Americans are also permitted to send money to relatives in Cuba for the purpose of starting small businesses.

We are excited about what 2012 will bring for Cuba and are optimistic change will continue to foster fledgling entrepreneurship. The Pope’s visit also promises to pave the way for greater religious openness and cast Cuba in a positive light from a human rights perspective.

Stocks owned by Herzfeld CUBA fund

The fund only invests in one airline, Copa Holdings, S.A. but invests in a number of regional banks such as Bancolombia, Banco Latinoamericano de Exportaciones and Puerto Rican bank Doral Financial Corp.. The fund owns 20,000 shares of Western Union. This seems to be a good investment since all Americans can now send money to Cuba, with restrictions of course.

América Móvil and Atlantic Tele-Network appear to complement the investment portfolio.

Some food related investments are Chiquita Brands International, Coca Cola Femsa and Fresh Del Monte Produce.

The fund’s investments in Carnival Corp and Royal Caribbean Cruises are worth more than $1,000,000 each.

More than 10% of the Net Assets are attributed to Seaboard Corporation. While this publicly traded company can have the legal ability to ship US agricultural goods to Cuba, the management has made a personal decision NOT to engage in that activity.

One investment that I found to be very interesting is Hugo Cancio’s Fuego Enterprises Inc. aka Fuego Entertainment. “Fuego Enterprises, Inc. is a diversified holdings company with operations in media and entertainment, telecommunications, and other industries currently under development. Fuego Enterprises is based in the U.S. with a focus on Latin markets.”

Mr. Cancio and his company invested a lot of time and money to produce the Cuban Music Festival scheduled for April 2011. It was cancelled due to alleged political pressure and the ACLU got involved.

Herzfeld has the investment flagged as “Non-income producing”.

Non-income producing assets

Fuego Enterprises is not the only “non-income producing” company in the portfolio. In fact, 29 out of 64 companies listed are flagged as non-income producing. As I said above, I am not a financial analyst but I found it interesting to learn that 45% of the assets are non-income producing. However, the company owns some old Cuban companies that may enjoy a financial gain in a post-Embargo, post-Castro Cuba.

These are the non-income producing assets:

Admiralty Holding Company (Note 2)
BCB Holdings Ltd
Ceramica Carabobo Class A ADR (Note 2)
Chiquita Brands International Inc
Cleanpath Resources Corp
Cuba Business Development (Note 2)
Cuban Electric Company (Note 2)
Doral Financial Corp
Fuego Enterprises Inc
Geltech Solutions Inc
Grupo Casa Saba, S.A.B. de C.V. ADR
Grupo TMM, S.A.B. ADR
Homex Development Corp. ADR
Impellam Group
Margo Caribe, Inc
Mastec, Inc
Popular Inc
Rail America Inc
Seacor Holdings, Inc
Shellproof Limited
Shellshock Ltd. Ord
Siderurgica Venezolana Sivensa, S.A. ADR (Note 2)
Siderurgica Venezolana Sivensa, S.A. Series B (Note 2)
Spanish Broadcasting System, Inc
Steiner Leisure Ltd
Trailer Bridge, Inc
Ultrapetrol Bahamas Ltd
W Holding Co. Inc
Waterloo Investment Holdings Ltd.(Note 2)

NOTE 2. NON-MARKETABLE AND RESTRICTED SECURITIES OWNED

Investments in securities include $165,000 principal, 4.5%, 1977 Republic of Cuba bonds purchased for $63,038. The bonds were listed on the New York Stock Exchange and had been trading in default since 1960. A “regulatory halt” on trading was imposed by the New York Stock Exchange in July 1995 and trading in the bonds was suspended as of December 28, 2006. The New York Stock Exchange has stated that following the suspension of trading, application will be made to the Securities and Exchange Commission to delist the issue.

As of December 31, 2011, the position was valued at $0 by the Board of Directors, which approximates the bonds’ fair value.

Investments in securities also include 250,000 shares of Admiralty Holding Company, 20 shares of Ceramica Carabobo Class A ADR, 700 shares of Cuban Electric Company, 895 shares of Siderurgica Venezolana Sivensa, S.A. ADR, 79 shares of Siderurgica Venezolana Sivensa S.A. Series B, 100,000 shares of Cuba Business Development and 70,348 shares of Waterloo Investment Holdings Ltd. As of December 31, 2011, the positions were valued at $0 by the Board of Directors, which approximates their fair value.

Two of the Fund’s holdings are currently segregated and restricted from transfer because they appear on the OFAC list. These securities are: $165,000 principal value Republic of Cuba bonds, 4.5%, 1977 in default with a fair value of $0, and 700 shares of Cuban Electric Company with a fair value of $0.

Havana Journal Inc Publisher Disclosure: I have a financial interest in this fund. This article was written for informational purposes only and is not a solicitation to invest. Havana Journal Inc was not compensated in any way for this article.

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