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A manager eyes Cuba
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December 9, 1998: 3:26 p.m. ET
Miami's Tom Herzfeld focuses on closed-end funds and the Caribbean Basin
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NEW YORK (CNNfn) - After 30 years as a money manager investing in closed-end mutual funds, Tom Herzfeld finds it ironic he's best known for his smallest project ever.
The tiny Herzfeld Caribbean Basin Fund, with just $11 million in assets, has grabbed headlines with its strategy to invest in companies that would benefit if the United States lifted its 37-year-old embargo of Cuba.
And Herzfeld, a leading expert in closed-end funds whose companies manage $100 million in assets, recently asked the U.S. Securities and Exchange Commission to review plans for another fund targeting Cuba.
While Herzfeld can't talk about the fund under review with the SEC, he spoke recently from his Miami offices about the business outlook in Cuba.
"I think both in the United States and elsewhere there's wide support for lifting the embargo," Herzfeld said.
Caribbean appeal
Herzfeld, 52, says he decided to specialize in closed-end funds because of the lure of buying something at a steep discount. While open-ended mutual funds create unlimited shares to meet investor demand, closed-end funds have a finite number of shares and act like stock by trading at a discount or premium of their net asset value.
"He's certainly a pioneer in the closed-end fund investment arena," said Margaret Starner, senior vice president of financial planning for Raymond James & Co., an investment advisory firm based in Tampa, Fla. "He has a reputation of knowing closed-end funds better than anybody else."
Herzfeld started out on Wall Street in the late 1960s and made enough of a profit shorting the market during a downturn in 1970 that he bought a seat on the New York Stock Exchange. He moved to Florida to raise his family 23 years ago.
He got the idea for the Caribbean fund (CUBA) while sailing in the region with his wife and kids. He realized that many investors overlooked companies that do business in the area.
"The lifting of the embargo would be a catalyst to ignite a boom in the entire Caribbean basin," Herzfeld said.
Plus, many of his friends and clients in Miami are Cuban-Americans. "All they talk about is 'Free Cuba.' "
The nation has been under the Communist rule of Fidel Castro since a 1959 revolution. The embargo has generated passionate political discussion in the Cuban-American community.
"I would like Castro to resign and see democracy and capitalism restored in the country," Herzfeld said. He declined to say whether he's been to Cuba, saying the answer would please some people and anger others.
The fund's biggest holding is a 15.51 percent stake in Florida East Coast Industries Inc., which has talked about long-term plans to build a rail barge to Cuba. The fund has a 6.25 percent stake in cruise line company Carnival Corp., another industry that could benefit from democracy in Cuba.
"Companies in the portfolio will get an enormous increase in business when the embargo is lifted," Herzfeld said. "We wanted to be there first."
The fund was trading at a 19.3 percent discount and down 7.10 percent as of Dec. 4, according to Morningstar Inc., a Chicago mutual-fund tracker.
The Caribbean fund has almost been a mirror of events in Cuba, rising on good news, like the visit earlier this year of Pope John Paul II, and falling on bad news, such as the downing of two small, U.S. civilian planes in 1996.
According to SEC documents, the Cuba Fund would initially invest about 65 percent of its assets in telecommunications and postal delivery service companies doing business in Cuba, which is allowed under the embargo.
If the embargo were lifted, the new fund would invest directly in domestic and international companies doing business in Cuba.
The Cuba Fund is still under SEC review, a spokesman said.
Some doubters
Not everybody is sold on the idea of a closed-end Cuba fund, however.
Gregg Wolper, international fund editor at Morningstar, said it doesn't make sense for investors to buy a fund that concentrates on a country without a stock exchange.
"Theoretically, some day there are going to be opportunities with Cuban companies, but that some day hasn't arrived yet and it's hard to tell when it will arrive," Wolper said.
Wolper pointed out that Franklin Templeton Group made the same mistake four years ago with its Vietnam Opportunities Fund. Templeton opened the fund on the idea it would be in place when Vietnam established a stock market. But the fund floundered because it started too soon, he said. Vietnam still doesn't have a stock market.
The Vietnam fund's charter required a shareholder vote if it didn't have significant investments in the country after three years. In a split vote in late 1997, some shareholders voted to liquidate, while others decided to merge the fund into the Templeton Vietnam and Southeast Asia Fund (TVF).
"I think there will be plenty of time to get into a Cuba fund once the political and economic situation changes and there's a stock market established," Wolper said. "Templeton came out prematurely, and also said that it anticipated conditions would change. I think the Cuba fund is in the same boat."
An island with potential
Many people see dollar signs in post-Castro Cuba, an island of 11 million people the size of Illinois 90 miles south of Key West, Fla.
One of the greatest carrots dangling before U.S. companies is that Cubans crave American products -- so businesses wouldn't have to spend millions building "brand awareness," said John Kavulich II, president of the U.S.-Cuba Trade and Economic Council Inc., a non-profit trade group that provides information on Cuba.
"They know Nike, they know McDonald's, they know Coca-Cola," Kavulich said. "The people of Cuba have one of the highest preference for U.S. brand names."
Another reason for interest in Cuba is it's the last undeveloped tourist destination in the Caribbean, Kavulich said. And Cuba would be a "multiple destination," meaning travelers would go to Havana, and then visit Santiago, Chile, and other vacation spots.
Any company that could help Cuba rebuild its infrastructure would also profit handsomely, Herzfeld said.
According to the council, about 2,500 U.S. business people traveled to Cuba in 1998, up from 500 in 1995.
Meanwhile, as Castro allows Cubans to celebrate their first Christmas since 1969, Herzfeld keeps watching for news about Havana.
"There isn't a morning that goes by that I don't pick up the Miami Herald and expect to see some sensational headline about Cuba," Herzfeld said. "Something could happen at any moment in Cuba."
-- by staff writer Martine Costello
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