Ask Thomas J. Herzfeld about Cuba, and the usually low-key money
manager launches into a sermon he has delivered many times.
The 67-year-old Mr. Herzfeld says the country, under a U.S.
trade embargo for 50 years, is the investment opportunity of a
lifetime. And his mutual fund, Herzfeld Caribbean Basin (CUBA), is
ready to capitalize when the restrictions are lifted, focusing on
stocks that he thinks will benefit from Cuba's opening.
Until then, though, the $26 million fund is waiting to pounce,
as it has been since it launched in 1993.
"I've been consistently wrong on when the embargo would be
lifted," he said while sitting in his office on South Beach. "But
it's going to happen." Mr. Herzfeld owns about $1.2 million in
shares of the fund.
Some investors are starting to prepare for the day when the U.S.
resumes trade with Cuba. The Obama administration has loosened
travel restrictions, and the Cuban government has approved economic
overhauls. But for investors, Cuba remains elusive.
"This is an investment theme that's way out of favor," said
Stuart Frankel, founder of New York brokerage firm Stuart Frankel
& Co. Inc., who said he bought shares in Herzfeld Caribbean
Basin after a trip to Cuba a few years ago. Still, "you've got to
be wrong first before you're right," Mr. Frankel said.
On Monday, Pope Benedict XVI, who opposes the trade embargo,
begins a three-day visit to Cuba, the first for a Catholic pope
since 1998. The fund's investors hope the attention will help
hasten the embargo's end, even though similar hopes have been
dashed over the years.
Mr. Herzfeld is mostly known among investors as a closed-end
fund specialist and the publisher of a monthly research report
called the Investor's Guide to Closed-End Funds. Closed-end funds
trade on exchanges and can change hands at prices far above or
below the value of their underlying assets.
Some Cuban-Americans said the country should remain off-limits
to U.S. investors. "It's morally wrong to invest in a country that
treats its people the way the government is treating the Cuban
people," said Ninoska Perez Castellon, director of the Cuban
Liberty Council, a Cuban exile organization that opposes lifting
the embargo until Cuba embraces democracy.
Herzfeld Caribbean Basin is up 10% this year, roughly in line
with the overall U.S. stock market. In the past decade, the fund
posted an average annual return of 9.9%, far above the Standard
& Poor's 500-stock index average annual return of 4%.
Mr. Herzfeld served a stint in the U.S. Army before landing a
job as a stockbroker at New York's Reynolds & Co. in 1968. In
1984, he launched investment-advisory firm Thomas J. Herzfeld
Advisors Inc. in Miami. Though he has never been to Cuba, he said
the many Cuban-American friends and contacts he made in Miami
during the 1980s piqued his interest in starting the fund.
He doesn't flout the U.S. embargo or try to tiptoe around it.
Instead, the fund's portfolio is packed with companies Mr. Herzfeld
thinks would be ready to swoop in if curbs are lifted.
For example, Carnival Corp. (CCL) will establish ports of call
in Cuba after the embargo ends, he predicts. About 5% of the fund's
assets are invested in shares of the cruise operator. Herzfeld
Caribbean Basin also holds food producer and cargo-ship operator
Seaboard Corp. (SEB), which could become a major shipper to Cuba,
he said. Watsco Inc. (WSO, WSOB), an air-conditioning-equipment
distributor, would modernize Cuba's cooling systems, he
predicts.
Some of the fund's securities look more like collectors' items.
Herzfeld Caribbean Basin owns 700 shares of Cuban Electric Co.
(CGAR), which has no assets other than some cash and a 50-year-old,
$270 million claim (plus interest) against the Castro government
for confiscating its power plants. Mr. Herzfeld said he bought all
the shares he could find in 2005. He thinks Cuba will try to settle
confiscation claims if the embargo is lifted. If the government
settled at least the initial judgment, he said, the fund would make
about $74 for each share. The fund's board said the trade embargo
restricts it from selling the shares. So, it values them at
zero.
Herzfeld Caribbean Basin also owns some bonds: pre-Castro
Republic of Cuba issues that would have matured in 1977 had the
Cuban government not defaulted on them in the 1960s. In 1995, Mr.
Herzfeld's fund snapped up $165,000 in face value of the bonds for
$63,038. Later, the New York Stock Exchange halted their trading,
forcing the fund to value the bonds at zero.
Other holdings include shares of publicly traded Fuego
Enterprises Inc. (FUGI), which runs music tours with Cuban artists,
and Cuba Business Development Group, a private company that owns
part of a telecommunications firm with business in Cuba. Both
companies fall under exceptions to the U.S. embargo or have
licenses that allow some entertainment and telecom companies to do
limited business with Cuba.
When Cuba makes headlines, such as on rumors of Mr. Castro's
death, the share price of Mr. Herzfeld's fund usually jumps. It
falls below its net asset value when sentiment darkens. That
happened after Cuba shot down a plane flown by an exile
organization in 1996. On Friday, the fund traded at an 8% discount
to its net asset value, according to Morningstar Inc.
To prepare for an end of the U.S. embargo, Mr. Herzfeld said he
meets frequently with Cuban-American consultants-- his "secret
weapons," he calls them--who feed him news on everything from Mr.
Castro's health to antiembargo movements in Congress.
Ted Williams, a former director of Herzfeld Caribbean Basin,
recalls at least 20 false alarms.
In January, he thought Mr. Castro was dead because several
months had passed without a public appearance by the former Cuban
president. "It will be huge for the [Herzfeld] fund," Mr. Williams
said in an interview at the time. A couple of weeks later, Mr.
Castro gave a six-hour presentation to mark the debut of his
memoirs.
-By Joe Light, The Wall Street Journal
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