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Herzfeld Caribbean Basin Fund bets on end to U.S. embargo
CubaNews / March 2003

By Larry Luxner

Thomas J. Herzfeld, the man who literally wrote the book on closed-end funds, would rather not say whether he backs Washington’s current hard line against Cuba.

But the day the embargo becomes history, he and the other 2,000 or so investors who have sunk money into the Herzfeld Caribbean Basin Fund will surely be smiling.

“Our strategy is clear: since we can’t invest directly in Cuba, we have decided to invest throughout the Caribbean Basin, and in U.S. publicly traded companies that would benefit from a resumption in trade with Cuba,” Herzfeld said in a phone interview from Miami.

“We think the prospects for those companies would be favorable if the embargo were lifted,” he told CubaNews. “The obvious ones are Royal Caribbean, Carnival Cruises and Florida East Coast Industries. A million potential tourists would visit Cuba in the first year, and the increase in rail traffic from Jackson-ville to Miami would be significant.”

Herzfeld, 58, launched the Herzfeld Carib-bean Basin Fund on May 20, 1993 — the 91st anniversary of Cuban independence. It began trading in January 1994 under the Nasdaq symbol “CUBA” at an initial offering price of $5.20 a share, was worth $3.14 a share at the close of business Feb. 20, and is one of only 545 closed-end funds in the United States.

FUND HAS DONE ‘REASONABLY WELL’

Unlike mutual funds, which continue to sell new shares endlessly, closed-end funds offer a fixed amount of stock. In this respect, they are just like any industrial firm or utility which — with the exception of splits or additional offerings of stock — always has the same number of shares outstanding.

Also, shares of closed-end funds are not redeemed at their net asset value (NAV), as are shares in open-end funds. Rather, they are bought and sold at the price the general market places on them.

The Herzfeld Caribbean Basin Fund is ma-naged by a unit of Thomas J. Herzfeld Advisors Inc., which charges a fee of 1.45% of average monthly net assets to manage the fund.

Over the last four years, the fund’s per-share value has dropped from $6.00 to $3.48, while per-share NAV has fallen from $6.43 to $3.92 in that same period. At the end of 2001, the fund’s net assets totaled $6.83 million, dropping to $5.74 million by the end of 2002.

On the other hand, since its initial offering in May 1993 the fund has paid out $2.5 million in distribution to its shareholders.

“It’s done reasonably well,” said Herzfeld, who personally owns 3.36% of the fund that bears his name. “It suffered with the general decline in the stock market, but last year we did outperform other Latin American funds.”

In 2002, the Herzfeld Caribbean Basin Fund lost 13.86% in NAV, which was worse than the average NAV loss of 6.19% by foreign equity funds in general. But the fund gained 0.81% in price, which was better than the average 3.78% price loss for foreign equity funds.

In both cases, the fund did better than most other funds focused on the region including the Mexico Fund, the Latin American Discovery Fund, the Latin American Equity Fund, the Chile Fund and the Brazilian Equity Fund.

PORTFOLIO INCLUDES 62 COMPANIES

Despite its “CUBA” ticker on Nasdaq, the Herzfeld Caribbean Basin Fund won’t buy stock in Canadian companies like Sherritt International or Leisure Canada Inc. that invest in Cuba — even though it can under U.S. law.

“We’re very careful not to do business directly in Cuba,” Herzfeld explained. “We don’t want to antagonize the Cuban-American community in South Florida. After all, these are the very people who we believe will be doing joint ventures with a free Cuba.”

Rather, its portfolio is spread among the United States (46.84%); Mexico (17.70%); Panama (9.85%); Cayman Islands (9.18%); Nether-lands Antilles (4.29%); Belize (1.89%); Puerto Rico (1.35%); British Virgin Islands (1.09%); Dominican Republic (1.04%); Colombia (0.29%) and Venezuela (0.14%). The other 4.23% is invested in Latin America as a region.

At present, 62 public companies are listed in the fund’s portfolio, but 68% of the fund’s total value is invested in just 10 of them.

These are Florida East Coast Industries Inc. (22.61%); PanAmerican Beverage Inc. (7.55%); Consolidated Water Co. Ltd. (7.07%); Florida Rock Industries Inc. (5.72%); Watsco Inc. (4.68%); Orthofix International N.V. (4.28%); Carnival Corp. (4.26%); Coca-Cola Femsa (4.17%); Royal Caribbean Cruises Ltd. (4.16%) and Mastec Inc. (3.61%).

In addition, the fund has smaller holdings in Wal-Mart de Mexico S.A., Grupo Televisa S.A., Seaboard Corp., Trailer Bridge Inc. and Virgin Islands-based Atlantic TeleNetwork.

The Herzfeld Caribbean Basin Fund has also gambled on Republic of Cuba bonds which have been trading in default since 1960. The bonds came due in 1977 and have a face value of $165,000, plus 17 years of coupons.

“The bonds are owned to a large extent by the exile community, who took the bonds with them when they left Cuba,” he said. “Since we really can’t get a bid for them, we take the conservative view that they’re worth nothing.”

Herzfeld, who has written five books on closed-end funds, also registered a Cuba Fund in 1994 but doesn’t talk much about it.

“Every year, our attorneys revise the statement to keep it current,” he said. “The Herz-feld Caribbean Basin Fund is a regional fund with a Cuba kicker in it, but the Cuba Fund would be more of a country fund, and I think it’ll be much larger. It doesn’t exist yet and we really don’t want to bring it to market until the embargo is lifted, but it seems to me that after 43 years, it can’t go on much longer.”

Once that happens, Herzfeld told us, “we intend to take profits in those investments in the short-term, and then invest directly in Cuba, perhaps in private ventures.”

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