The Johnny Depp of Closed-End Funds Talks CUBA (part 8)

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Closed-end fund guru Tom Herzfeld discusses Cuba and his most popular fund, the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA).

[Continued from part 7]

Nick Slepko: How about Grupo Aeroportuario del Sureste (NYSE: ASR)?  They run several airports in southern Mexico, and their stock has done well even during the recession.  How did they get on your radar? 

Tom Herzfeld: We got them as a result of an arbitrage.  It was a holding in a closed-end fund, The Mexico Fund (NYSE: MSF).  The fund was trading at a discount and there were a lot of companies in their portfolio we liked so it was a chance to get a lot of stocks we liked at a discount – by the way, our own stock is currently at a discount which makes it a very good value.  The Mexico Fund then announced a distribution in-kind and that was how we got shares in several Mexican companies at a discount – though we got the full value of the holding when they made the distribution in-kind.

One of the little esoteric areas of closed-end funds is that if a closed-end fund trades at a discount to net asset value, and they then liquidate, or reorganize it as an open-end mutual fund, or make an in-kind distribution, the shareholders will receive the equivalent of full net asset value.  So you might end up with a portfolio at 100-cents on the dollar, even though you paid 80-cents on the dollar.  That is one of the things that makes closed-end funds trading at discounts attractive.  Of course as closed-end fund investors we believe this more than anyone.

Slepko: What about your communications holdings (which make up about 5% of the Fund)?  Many of them are Mexico-based.

Herzfeld:  Well, Grupo Televisa (NYSE: TV) has done well.  Grupo Radio (NYSE: RC) has not.  Televisa is a particularly strong company in the Caribbean and are launching a local version of CBS’ medical daytime format The Doctors, thereby continuing to take a leadership role in the industry. Grupo Radio’s radio station assets have been acquired by a newly formed entity, 93.9 Holdings, Inc., pursuant to the Put and Call Agreement entered into with Emmis Communications Corporation and certain subsidiaries in April 2009, which was amended in April of this year to reduce the purchase price to US $85.5 million. 

At first, rather than investing in local stocks in local companies, my first look at Mexico was in ADRs [like the Grupos], plus we’ve known the managers of the Mexico Fund since the 1980s.  They do a very good job and I’ve always followed what they’ve invested in.

Slepko: Why did you trust the ADRs?

Herzfeld: The ease of investment, the listing standards, and then over the years I started to pick up on some of the local companies in local shares.  Trying to guess which companies are going to concentrate on Cuba is all speculative, a lot of hunch plus a lot of intuition, but good companies right next door to Cuba are likely candidates.

Slepko: Why Mexico?

Herzfeld: As I mentioned before, Mexico is a very well developed economy.  They understand business and I think if there’s an opportunity in Cuba, Mexican companies will be there in strength.

Slepko: What about Brazil?  Won’t Brazil be a factor in the Caribbean?

Herzfeld: I don’t consider them eligible to be a Caribbean Basin company [under our definition].  But I think they will have something to do with Cuba.  There are a few there already, doing something in ethanol I believe.

In any case, we were formed to invest in the companies of the Caribbean Basin.  Some people have questioned if the US is a Caribbean Basin country but, yes, it does meet the definition.

Slepko: So were you formed to make the Caribbean profitable, and not necessarily to make a profit off the Caribbean?

Herzfeld: We were formed to make investments in companies that we think will make money for our shareholders.  Having said that, I’ve been trading closed-end funds for forty-four years. It’s a very calculated process we use. For instance, we buy them at eight, sell them at nine, buy them back at six, and sell at seven, and sell them short at twelve and buy them back at eleven.  After four plus decades, we’re good at it and getting better.  But for me, to have an opportunity to be involved in rebuilding Cuba is a refreshing change of pace from buying something at six and selling at seven a few hundred times a year, although we’ve made a great success of it.

One day, I would like the Herzfeld Caribbean Basin Fund to do what you said, to make direct investments in Cuba and get involved in rebuilding the country and the financial system. I’d like to be involved in reactivating the Havana Stock Exchange. Also on the drawing board is a project to exchange shares of a Havana Stock Exchange-listed reconstruction fund for prior claims issued for property confiscated by the Castro government. That would give the holders of these prior claims a liquid investment with growth opportunity and a participation in rebuilding the country. At that point, I would like Herzfeld Caribbean to be a lot larger than it is now, and that is one of the things we consider. 

[Continued in part 9]




Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Grupo Aeroportuario del Sureste (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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