Mon 4 Dec 2006
I heard a piece on Market Place (with both audio and transcript) over the weekend about investing in Cuba via the Herzfeld fund. It’s a closed end fund, trading at a much higher premium to NAV than I’m comfortable with (nearly 40%), but it does have a tantalizing investment strategy, and the fund is up 50% so far this year. Herzfeld focuses on businesses in the US that are poised to profit when US/Cuba relations are restored. Here’s a great quote from the piece that highlights this principle: “While many have visions of glass-walled hotels on the Malecon, Herzfeld has his eye on Cuba’s crumbling infrastructure. Most of Cuba’s ports are too shallow for modern container ships. And Trailerbridge has one of this country’s largest fleets of shallow draft vessels ? ships that don’t dip too deep.”
The good news is that his fund can still grow and flourish even without Cuba ties since his companies can still do business in the US and abroad even if the 1962 embargo holds for decades to come. With Castro’s failing health, and Raul’s hand extended to the US, things are poised to make a change in Cuba. However, I personally wouldn’t bet that our current administration is at all interested in normalizing our relations with Cuba, so we’re at least 2 years away from anything changing. What’s great about the Herzfeld fund is that it highlights how we should be thinking and investing in stocks/funds that are poised to profit from inevitable changes. There’s so little chance that the 1962 embargo will last indefinitely, and there’s so much investor interest in Cuba, that this investment idea seems like a no brainer as long as you have a fairly long time horizon.
(This article has been corrected thanks to comments from Jason – Thank you for the feedback!)
December 4th, 2006 at 10:23 pm
I’m not sure if you have your terminology right… closed-end funds are open to the public and trade like ETFs… and I just checked, and CUBA is available for trading through Schwab. You probably can’t buy CUBA in certain automatic investment plans (or 401ks), but it should be open for buying in a traditional brokerage account.
The catch with a closed-end fund (as previously detailed here) is that they can trade at a premium or discount to NAV (net asset value). CUBA happens to be trading at a 38% premium to NAV, which means you’ll pay $1.35 in the market for $1.00 in fund assets/holdings. Wait for this one to cool down before considering putting any money into it…
December 4th, 2006 at 10:35 pm
In fact, if you really want to invest in CUBA (the fund) without the premium, take a look at the 25 largest holdings in the fund.
19% of the fund is invested in Florida East Coast Industries (FLA). 50% of the funds holdings are in the top 6 positions.
December 5th, 2006 at 9:18 am
A good investment study technique could be to use Herzfeld or any star money manager as an indirect investment guide. If I had more time, I’d like to reverse engineer each of the top picks as an intellectual exercise. Why is FLA his top pick? What criteria did he probably use to select them? What risks does each company carry if Cuba doesn’t normalize relations with the US?
Thank you for this info Jason–see the article above has been corrected responding to your comments.
December 5th, 2006 at 1:46 pm
Interesting point… if the fund is up 50%, but the premium to NAV is at 40%… how much of the performance result is from the underlying investments, and how much is due to inflation of the premium?
Looking at the ETFConnect chart, it looks like CUBA was trading at a slight discount up until September, which means that the recent price gains are almost all due to premium inflation.
Mix in the 40% turnover (which will hurt at tax time) and the 3.3% fees (which hurts all the time), and CUBA as a fund is looking less and less appealing to me. The core idea still has a lot merit though…
December 5th, 2006 at 2:45 pm
CUBA is up quite strongly today (over 13% on the day at the moment!). Just an interesting side note…
I’m with you on the core idea that CUBA as a fund is not appealing due to the costs, tax implications and NAV issues. I’m all about letting someone else pay the premium to invest directly in the idea and just check in regularly to see how the holdings are shifting and changing out.
Where did you go to get the list of top 25 holdings? And, how often is this list updated?
December 6th, 2006 at 2:02 am
The portfolio is listed on Morningstar as well as a few other places… http://quicktake.morningstar.com/CEFNET/Holdings.aspx?Country=USA&Symbol=CUBA&fdtab=portfolio
Morningstar’s site has a few shortcomings… for example, they didn’t recognize Florida East Coast Industries as FLA, though the other publicly traded positions are properly linked… A quick search will usually uncover such shortcomings.
December 6th, 2006 at 5:55 pm
I just saw the format over at closed-endfunds.com and it’s pretty swanky too…
http://www.closed-endfunds.com/FundSelector/FundDetail.fs?ID=4842
According to that site, CUBA is now trading at a 70% premium to NAV!
January 2nd, 2008 at 12:55 pm
By the way, the premium on CUBA (the fund) is back down to zero… just in case you were considering it as an investment still.
http://www.etfconnect.com/select/fundpages/global.asp?MFID=10353