Posted September 18, 2013 by publisher in Cuba Business.
Letter to Stockholders from Thomas J. Herzfeld Chairman, President and Portfolio Manager of the Herzfeld Caribbean Basin Fund dated July 31, 2013.
Dear Fellow Stockholders:
We are pleased to present our Annual Report for the period ended June 30, 2013. On that date, the net asset value of The Herzfeld Caribbean Basin Fund, Inc. (CUBA) was $9.28 per share, up 20.56% for the fiscal year then ended, adjusted for the year-end distribution of $0.196 per share. The Fund’s share price gained 25.31% for the 12-month period, adjusted for the distribution.
The Herzfeld Caribbean Basin 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. U.S. relations with Cuba are particularly influential to the region and, therefore, we keep a close eye on any developments.
Although media attention has been sparse, there has been an undercurrent of activity surrounding Cuba. For instance, effective January 2013, Cuban President Raúl Castro made a historic change to the country’s travel laws. Under the new policy, Cubans are eligible to apply for passports to travel abroad; previously, they had to acquire a formal letter of invitation and also obtain an exit visa. We have also noticed substantive diplomatic outreach for the first time in years.
Talks on immigration and the resumption of direct postal services between the U.S. and Cuba have been initiated. In June, the U.S. State Department granted special authorization for Cuban diplomats to visit Miami to hold meetings with migrants.
Representatives of travel agencies and advocacy groups seeking to normalize U.S. relations with Cuba were in attendance. The State Department has not granted this type of permission to Cuban diplomats since 1998.
Cuban Minister of Economy and Planning, Marino Murillo, announced a 2014 economic plan to deregulate state-owned companies and attract more foreign investment. The plan would give companies more autonomy, allowing state-owned companies to keep 50% of profits, after taxes, for investment and wage increases. This is in contrast to the current system in which all company investment must first be approved by, and all profits go to, the state. The goal is to improve business efficiency and pay down the debt that has depressed Cuba’s economy.
We continue to monitor developments in and related to Cuba with a view towards participating as an investor in the future rebuilding of that country, when permitted.
In the meantime, even without dramatic change, the Caribbean region has done well. Several of the Fund’s holdings turned in good performances since we last wrote to you in our semi-annual report.
Mastec, Inc. (MTZ), an infrastructure construction company based in Florida, is our fourth largest holding. The company continued strong positive momentum, posting a 32.0% gain for the six months ended June 30, 2013. In March, the company issued $400 million of 4.875% Senior Notes, using some of the proceeds to redeem a portion of its outstanding 7.625% Senior Notes, lowering borrowing costs and raising cash. MTZ also acquired Big Country Energy Services at the end of May 2013; Big Country Energy builds pipelines and develops oil fields. We believe the acquisition should benefit MTZ by taking advantage of the growing push for domestic U.S. energy production. We sold about a quarter of our holding in MTZ during the first half of the calendar year as we looked to rebalance our portfolio and realized some profits.
We are pleased to report that several of our other holdings also turned in gains in excess of 30% during the first six months of calendar 2013.
Copa Holdings (CPA), up 31.8%, a Panamanian airline providing passenger and cargo services
Atlantic Tele-Network (ATNI), up 36.6%, a provider of telecommunications services to North America, Bermuda and the Caribbean
Chiquita Brands (CQB), up 32.4%, a fresh produce distributor
Consolidated Water Company Limited (CWCO), was one of our stellar performers, up 56.5% in the first half of 2013. CWCO develops and operates water production and distribution systems in the Caribbean and is headquartered in the Cayman Islands. CWCO is looking to expand its operations globally.
For years we had been anticipating a public offering of Norwegian Cruise Line Holdings Ltd. (NCLH) and, in January 2013, it began trading on NASDAQ. In June 2013, we added NCLH as a new holding for the Fund. Caribbean cruises are typically split between East and West Caribbean itineraries, with both taking alternative routes around Cuba. The major cruise lines which operate in the region are NCLH, Royal Caribbean Cruises, Ltd. (RCL) and Carnival Corp. (CCL).
We believe all are in a position to benefit from any relaxation of the U.S. embargo against Cuba and normalization of relations that would result in a boost to tourism. The Fund currently holds core positions in all three.
Mexican equity markets generally traded in lockstep with U.S. equity markets during the period from March 2009 to January 2013. Since rising to an all-time high in late January, however, the Mexican Bolsa has sold off while the U.S. equity market diverged, continuing its rally through May. The Fund’s largest Mexican holding in local shares (those purchased on the Mexican Bolsa rather than traded on U.S. exchanges as American Depository Receipts) is Wal-Mart de México, S.A.B. de C.V. Series V (“Walmex”), which represented 1.55% of the portfolio as of fiscal year-end. For the six months then ended, Walmex was down 12.8%, in U.S. dollars, hurt by the overall market trend and bad earnings. We continue to remain sanguine on Mexico and especially Walmex, given their growing footprint in the region.
Overall, for the calendar year through June 30, 2013, The Mexican IPC Index lost approximately 7% (measured in U.S. dollars). Mexican securities made up 23.36% of the Fund’s holdings at the end of the fiscal year, so the negative trend has detracted from the Fund’s performance.
The above commentary is for informational purposes only and does not represent an offer, recommendation or solicitation to buy, hold or sell any security. The specific securities identified and described do not represent all of the securities purchased or sold and you should not assume that investments in the securities identified and discussed will be profitable. Portfolio composition is subject to change.
Read the full CUBA fund annual report here.
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