Manuel Schiffres, Executive Editor,
Kiplinger.com
Thursday, February 21, 2008; 12:00 AM
It's not common for a closed-end fund to be among the market's leading
gainers (or losers, for that matter). But that is exactly what's been
happening on February 19 to the shares of Herzfeld Caribbean Basin, a
small closed-end fund designed to benefit from the opening of the Cuban
economy once Fidel Castro disappears from the scene.
Castro, Cuba's supreme leader since 1959, finally appears ready to go.
He announced early in the day that he has resigned as president and that
he will not aspire to regain the post or accept it if it is offered to
him. As a result, shares of Herzfeld Caribbean Basin (symbol CUBA)
jumped $1.26, or 17%, to finish at $8.70 February 19.
Herzfeld, a long-time closed-end fund maven, launched Caribbean Basin in
1994 as a vehicle for benefiting from Cuba's eventual return to the
capitalist fold. Herzfeld was, shall we say, a tad early. There is yet
no stock market in Communist Cuba. So, until recently Herzfeld had
loaded his $30 million fund with companies, mostly based in the U.S. and
Latin America, that he believed were likely to benefit once Cuba opens
its economy.
Herzfeld continues to hold many of those stocks, which he felt could
perform well even without a rapprochement between the U.S. and Cuba.
Lately, Herzfeld says, he's been investing in companies that are best
positioned to benefit from the possible liberalization of Cuba's
economy, regardless of a company's outlook over the next year. Herzfeld,
hoarse after giving 14 interviews by late afternoon on February 19,
declines to identify any of those stocks.
In addition, Herzfeld says he is negotiating possible Cuban business
ventures with Cuban Americans in Florida. "We're looking at every type
of business in terms of size and industry, from mom-and-pop hardware
stores to major infrastructure rebuilding projects, once they're legally
permitted," says Herzfeld, who's based in Miami.
If Herzfeld strikes any deals, his fund would end up with stakes in
privately held companies. (How about a business to import '55 Chevys and
other golden oldies? Cuba is filled with historic U.S.-made cars that
seem to be held together with Band-aids.)
As of September 30, according to Morningstar, 41% of the fund's assets
were in U.S. stocks. The biggest position, at nearly 9% of assets, was
Seaboard Corp. ( SEB), which processes food and, more interestingly,
provides containerized cargo shipping services between the U.S. and
about 25 Latin American countries. Its stock, by the way, trades for
nearly $1,600.
Other big holdings were Consolidated Water ( CWCO), a Cayman
Islands-based company that operates water-distribution systems in the
Caribbean; Atlantic Tele-Network ( ATNI), which provides
telecommunications services in the U.S. and the Caribbean; and
cruise-ship operators Carnival ( CCL) and Royal Caribbean Cruises ( RCL).
The fund's long-term performance has been okay, although, frankly, there
are no perfect benchmarks with which to compare it. Over the past ten
years through January 31, Caribbean Basin returned an annualized 8.1% on
assets. That compares with a 7.4% annualized return for the average
global stock fund. (Return on assets measures the performance of a
fund's holdings and, to some degree, its manager's ability; over the
past decade, Caribbean Basin returned 7.8% annualized on its share
price; that figure represents what shareholders earned, less trading
commissions.) Thanks to the big February 19 advance, the fund's shares
have gained 10% year-to-date.
Before jumping into Herzfeld's fund, it's important to know how
closed-ends operate. These funds issue a fixed number of shares and then
trade just like stocks. Unlike the newer exchange-traded funds, which
are designed to minimize gaps between the value of the share prices and
the underlying assets, old-fashion closed-ends almost always trade at
prices that differ from the value of their assets.
As of the February 19 close, Caribbean Basin shares traded at a 7.8%
premium to net asset value, or NAV. Over the past five years, the fund's
premium-discount swings have been dramatic. For much of 2004 and 2005,
according to Morningstar, the fund's shares sold for about 15% less than
NAV.
But the shares spiked dramatically in the middle of 2006, when news
about Castro's health problems first emerged. At one point that year,
Caribbean Basin's shares sold at nearly twice the value of its
underlying holdings. "The fund's shares react favorably or negatively to
the news coming out Cuba," says Herzfeld.
So is this a good time to buy into Herzfeld Caribbean Basin? It's always
better to invest in a closed-end when you can buy it at a big discount
to NAV. But, given this fund's previous response to news about Castro's
illness, it's conceivable that the shares may once again command a big
premium. As such, risk-tolerant investors who are willing to watch the
fund carefully may want to consider buying into CUBA even if it's
trading at a small premium to NAV.
Long-term investors, however, need to pay attention to developments in
Washington and Havana. Herzfeld says he'll carefully watch events in
Cuba on February 24, when the National Assembly is scheduled to choose a
Council of State, which, in turn, will select the next president. But
what would really propel Caribbean Basin's shares-not to mention those
of many of the stocks it holds-is termination of the U.S. trade embargo
with Cuba, says Herzfeld. When that will happen is anyone's guess.
Meantime, if you want to celebrate Castro's abdication by lighting up a
Cuban cigar, you'll have to travel to Canada or Mexico to buy one.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/21/AR2008022101609.html
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