A Cuba Optimist Keeps on Waiting

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

A Cuba Optimist Keeps on Waiting
By JOE LIGHT

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 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 +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.

http://online.wsj.com/article/SB10001424052702303812904577299632008976046.html