Sunday, March 25, 2012

A Cuba Optimist Keeps on Waiting

MUTUAL FUNDS - March 23, 2012, 5:56 p.m. ET

A Cuba Optimist Keeps on Waiting

MIAMI BEACH, Fla.—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, 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

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 +0.16% 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
+1.44% which could become a major shipper to Cuba, he said. Watsco Inc.,
WSOB -2.20% 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., 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 Entertainment
Co., 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.

A version of this article appeared Mar. 24, 2012, on page B1 in some
U.S. editions of The Wall Street Journal, with the headline: A Cuba
Optimist Keeps on Waiting.

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