The Johnny Depp of Closed-End Funds Talks CUBA
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Like the passionate, talented, and independent-minded Johnny Depp, whose Caribbean franchise success is well-known, there is so much more to Tom Herzfeld, the world’s leading expert on closed-end funds. Since 1984, he has chaired Thomas J. Herzfeld Advisors, Inc. – the first investment management firm specializing in closed-end funds. Similar to Depp, Herzfeld has done well by being judicious in his choice of partners and selective in the interests he has pursued. In addition to authoring five books, Herzfeld recently teamed up with Virtus Investment Partners (NASDAQ: VRTS) to launch the Virtus Herzfeld Fund (VHFAX, VHFCX, VHFIX), an open-ended mutual fund of closed-end funds. Even though Herzfeld and his team manage 6 four- and five-star closed-end investment programs with approximately $120 million in assets, the firm’s $30 million Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) is the one that continues to receive the most attention and inspire the most debate.
Nick Slepko: The Herzfeld Caribbean Basin Fund has been around for quite a while now, but you’ve had success in other areas of investing for even longer. How did Cuba become your thing?
Tom Herzfeld: Yes, the [Caribbean] Fund has been around now about 16 years. I’ve been specializing in closed-end funds since the 1960s, when I entered the securities business. Closed-end funds invest in every segment of the stock and bond market, but, historically, they have been the way people have invested in emerging markets. The practice goes back to companies like Foreign & Colonial (LSE: FRCL) in Britain which was formed in 1868 to invest in the overseas markets. By the mid-1900s, the US saw the beginning of single-country funds. The first was The Japan Fund, followed by The America South Africa Fund, The Mexico Fund, and The Germany Fund. Foreign & Colonial remains one of the largest closed-end funds in world and was one of the first funds I bought for my closed-end fund accounts when I started it. They still have a very good reputation and are in dozens of countries now.
Another early UK closed-end fund with an even more interesting story (and a more complicated reputation) is the Baring Fund, which after raising its capital used it to buy the debt of the Argentine Republic. Shortly after the fund’s launch, the Argentine government defaulted, causing the Baring Crisis [Panic of 1890] in London. The Bank of England had to bail out Barings. It was about a hundred years later that [Barings Bank] had their final crisis.
Even today the closed-end structure is very beneficial for portfolio managers in emerging markets like the Caribbean Basin because, unlike mutual fund managers, they don’t have to accept redemptions or take in new money at the whim of the shareholders. Therefore, once they raise the initial capital the fund manager has the ability to make less liquid investments.
Over the years, Thomas J. Herzfeld Advisors has been approached many times by very well known mutual fund groups to create a publicly traded, open-ended fund to invest in closed-end funds. Closed-end funds are what we are famous for, and we have a very strong presence and track record. People are very familiar with our work because of my public advocacy for the closed-end fund sector and the books I have written on the subject – the first was The Investor’s Guide to Closed-End Funds, published by McGraw Hill in 1979…Jim Rogers also brought me on CNBC about twenty years ago to do commentary on closed-end funds…
Investors know who we are, but we don’t employ any salesmen and we have a high investment minimum in order to maintain the integrity of our strategies. So what we were seeking was the right relationship with a top mutual fund company that could provide an investment vehicle for the average-sized investor that wanted access to our management.
I think after many years of searching, we found the right fit with Virtus. I like the people and I like the Virtus model. They provide investment management through their own well-known advisors and have also teamed up with a very impressive group of independent sub-advisors. Their one-stop, multi-boutique asset management concept is very compatible with our own business plan and we are proud to join in their ranks. Virtus is a company that we envision having an excellent, long-term relationship with. Just this month we launched the Virtus Herzfeld Fund and, for the first time, we are delighted to offer small investors the opportunity to benefit from our experience and management in closed-end fund investing.
Given that we specialize in closed-end funds and are located here at the top of the Caribbean [in Miami], we figured why not a fund to invest in the Caribbean? Having lived here for 36 years, we know many Cuban-Americans that came here with nothing and became great successes. We followed their stories with great interest and I know many of them both socially and professionally. My children went to school with their children. You cannot help but become immersed in the Cuban culture when living in Miami.
We subscribe to the idea that once the embargo with Cuba is lifted there will be a boom in that country. We were also thinking about the benefits Cuba’s neighbors in the Caribbean Basin would receive. Although we really wanted to form a Cuba fund, we thought it wouldn’t work because there was no way to predict when the embargo would be lifted. Yet, we didn’t want the predicament of raising the money but being unable to invest directly in Cuba. What else could we do with the capital that would benefit shareholders? From that point we started examining opportunities elsewhere in the Caribbean and looking at companies there that were doing well, but would also get a real boost if trade were resumed with Cuba. So that became the investment strategy of the fund.
Many of the investors in Herzfeld Caribbean and those who follow it think that Fidel’s death or Congress lifting the embargo will be the eureka moment of the fund. But we are looking for good investments, not just an end game. And our performance reflects that – if you were an original Herzfeld Caribbean investor, you are up 124% on your money, and so far this year the net asset value of the fund is ahead 18%.
Slepko: Well, you’ve bought up some of Cuba’s pre-Castro government debt, which defaulted, [and is part of the portfolio of the Fund] and are still going strong, but will Herzfeld outlast Barings and Foreign & Colonial?
Herzfeld: We already have and will. By the way, the Republic of Cuba bonds were already in default when we acquired them — that was a strategic and classic distressed debt investment. Plus, we have a great team, a strong board, and a new generation at our firm, which includes my son and daughter. They both had Wall Street careers before joining the firm including positions at JPMorgan, Lehman Brothers, and Goldman Sachs both here and abroad. They bring more education, experience, and familiarity with the world than I had when I began 47-plus years ago. My son Erik co-manages Herzfeld Caribbean, and my daughter Brigitta handles a lot of our Asian activities.
I’m very proud of my executive vice president, Cecilia Gondor. In addition to being EVP and Chief Investment Officer of Thomas J. Herzfeld Advisors, she is the Chief Compliance Officer of the Herzfeld Caribbean Basin Fund. Cecilia is my right-hand person. Thirty years ago, I hired her right out of university as my secretary…She’s probably considered in her own right a leading expert on closed-end funds (just google her name). In the last two or three years, she’s been giving most of our interviews on closed-end funds and has taken over editing our monthly research report, The Investor’s Guide to Closed-End Funds. She also heads up our consulting on closed-end funds.
Cecilia’s parents and siblings are doctors and she was pre-med at George Washington University. One of her early classes was chemistry and on the first exam her grade was so high it disrupted the curve to the point that everyone else almost flunked. In the high-pressure pre-med environment, the other students were so mad they would hardly talk to her. Shortly afterwards she switched to business administration and moved to Miami. Cecilia’s a true genius.
It was actually my daughter’s suggestion that I originally do a Cuba fund. That’s why I brought it up that day on Fisher Island. Brigitta was in school here [in Miami] with a lot of Cuban-American chums, and she started meeting their families and telling me how successful they were (I would hear a lot of rags to riches stories)…Then Hurricane Andrew came, and our house was destroyed and she was very upset about it – a palm tree went through the roof of our house and right into her bedroom. She was traumatized by it, and told us, “You know I’m going to go away to school, I don’t want to be in Miami any more. My school was wrecked, our house was destroyed. I want to go away for prep school.” My wife and I said, “Well, your brother just left for college and we were hoping you would be here with us – and you know this is the end of August and prep school begins in like a week.” She said, “Well look if I can get into a good school, will you let me go?” I figured there was no downside in this because we had no electricity and no phone, so how in the world is she ever going to get into a prep school? She comes back a week later, and says, “I’ve been talking to the dean of Choate, and he took me.” We were devastated, all of sudden we were empty nesters.
[After years studying and working in Asia and on both coasts of the US,] Brigitta’s now based up in Boston, speaks several languages, and is having her second child later this month.
Slepko: So, now that she’s doubled your position in grandkids and speaks English, Mandarin, Spanish (and a few Scandinavian languages for good measure) she can basically understand anyone on the planet…Your daughter and firm do a lot of investing in Asia, how does investing in China compare with the Caribbean?
Herzfeld: Well, China is a difficult market that everyone complains about. A long-time China investor told us the story of how, after meeting with one company, he found that the offices had been rented temporarily and the employees were actors.
Fortunately, our investments in Asia are through closed-end funds. Herzfeld Caribbean is the only area of investment in which we are buying shares of individual companies. All of our other investments are driven by qualitative, quantitative, and fundamental research into other closed-end funds.
Slepko: Well, let’s talk about CUBA then. While the fund is mainly designed to anticipate gains from a Free Cuba, it really is one of the only vehicles for investors interested in the Caribbean as a whole.
Herzfeld: Yes. For instance, one of our holdings is Steiner Leisure (NASDAQ: STNR). Their stock is seen by a lot of people as a proxy for the cruise industry since they run the spas on board many of the ships across cruise lines and have exposure to the industry without the direct risk of oil prices. Steiner is based in Miami so we cross paths with their management often.
[Continued in part 2]
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