When -- or if -- Fidel Castro's regime falls and trade resumes between the U.S. and Cuba, Thomas Herzfeld will be ready. In 1994, the Miami money manager came up with a back-door way to invest in Cuba: a fund that holds U.S. and Latin American companies he thinks will benefit if the trade embargo is lifted.
Herzfeld Caribbean Basin is a closed-end fund that trades under the symbol CUBA. Shares of close-end funds trade on exchanges like stocks and can be worth more or less than the assets they hold, depending on investor demand. At the end of July, the $14 million fund traded at $7.05, a discount to its net asset value (NAV) of 7%. After word of Castro's ailing health spread in early August, the shares jumped to $9.50 -- representing a premium to NAV of more than 20%. The fund closed Wednesday at $8.10, a 6% premium to NAV.
The fund has generally traded at a discount to NAV over the years, although it's not unusual for news events to cause spikes in its share price. Such was the case in 1994 and 1995, when shares frequently traded at a premium amid speculation that President Bill Clinton would end the decades-long trade embargo with Cuba. But shares plummeted in February 1996 when Cuban missiles shot down two civilian aircraft in international airspace.
The majority of companies in Herzfeld's 30-stock portfolio are small and medium-sized companies, and nearly half of all holdings are headquartered in the U.S., including Puerto Rico. Other companies in which the fund holds stakes are based in Mexico, the Cayman Islands and Panama.
Herzfeld seeks to invest not only in companies that will cash in if the trade barriers are lifted, but also perform well on their own. The fund's largest holding -- at 16% of assets -- is Florida East Coast Industries (symbol FLA), which operates a railroad running along Florida's east coast. Herzfeld thinks the line would see a surge in freight traffic from trade with Cuba. Other holdings include Carnival (CCL) and Royal Caribbean Cruises (RCL), both of which would both be able to expand travel routes to Cuba; Copa Holdings (CPA), a Latin American airline that makes daily flights to Havana; Watsco (WSO), a Florida-based manufacturer of air-conditioning and refrigeration equipment; Florida Rock Industries (FRK), which makes construction materials; and Trailer Bridge (TRBR), a marine freight carrier that runs a fleet of vessels made for shallow waters. Few of Cuba's ports can admit deep ships.
Many of Herzfeld's picks have delivered lately. Florida East Coast Industries and Wasco both posted double-digit increases in revenues and earnings during the second quarter of 2006. Others, such as Florida Rock Industries, have stumbled: The company failed to meet analysts' expectations in the second quarter because of the slowdown in housing construction.
The fund's performance over the long term has been somewhat below average. Over the past ten years through July, it returned an annualized 7.1% on NAV (the best way to measure the manager's performance). Over the same period, Standard Poor's 500-stock index returned 8.9% annualized, and the SP Global 1200 returned 9.3% annualized.
But theoretically, the real payoff will come when, and if, U.S. lifts economic sanctions and capitalism returns to Cuba. Betting on such events is chancy. But if you think Fidel's -- and communism's -- days are numbered, Herzfeld Caribbean Basin is as Cuba-focused as you can get with a mutual fund.