The Johnny Depp of Closed-End Funds Talks CUBA (part 9)

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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 8]

Slepko:  One of your other Mexican companies, Grupo Casa Saba (NYSE: SAB), seems like it could take advantage of US companies being allowed to sell pharmaceuticals and medical-related items.

Herzfeld:  Our position in Casa Saba began when I met one of its principals and had a good talk with him.  They are demonstrating improved performance to institutional clients in Mexico and Chile. My approach to investing is not as a hardcore trained analyst.  I am more drawn to investment ideas…I’ve been in the market for forty-seven plus years and we have one of the best track records in the industry – certainly our closed-end fund performance has placed us in the top ranks of all managers.  Yet, I’ve never had any formal training as a stock market analyst…I used to get a little defensive about that, but not anymore.  Sometimes I buy things because I like the story, but that approach has produced good returns…We don’t use outside research.  We look at companies ourselves or companies suggested to us by our consultants, but we don’t use brokerage house research reports or that sort of thing. My son Erik, who is co-portfolio manager, unlike me is classically trained in economics and finance. He has degrees from Johns Hopkins and MIT before joining Herzfeld Advisors six years ago. He cut his teeth with Lehman Brothers and then with JPMorgan in the US and Asia.

Slepko: What was the reasoning behind Garmin (NASDAQ: GRMN)?

Herzfeld:  I use their products and like them a lot.  Interestingly, my final decision to buy it was a bit quirky. The backlight on my GPS broke after two years and the company wouldn’t replace it. I had to buy a new GPS. I was really miffed and made a big stink about it to the management, but then I realized that they were probably making a lot of money by making people throw out their old GPSs and buy new ones. [NS: Sort of like a “reverse Buffett” move.]  We did very well with Garmin, though we now own very little of it.  We thought there would be a lot more boat traffic and GPS sales with Cuba eventually opening up, but ultimately that was a very weak Cuba play that ended up working out well for us. 

We like to trade, so in my ten or twenty largest holdings, even though I want to own them long term, we trade around the core positions.  On any day there is bad news or disappointing earnings, or if the stock is off sharply, the chances are I’m adding to my position.  On the flip side, in situations where there is a positive earnings surprise – and the stock rallies sharply – I might lighten up and take a profit on the portion of our holdings and look to buy it back.  Basically, I like to keep a core position, but I’m not adverse to selling a portion of it on strength and adding to our holdings on a sell off. We use the short-term trading profits to offset some of the fund’s operating expenses.

When would I exit a stock?  I’m certainly not going to sell off our core holdings like Carnival or Royal Caribbean.  These are stocks I want to hold until they can go to Cuba, even though I might lighten up on occasion. By the way, both Carnival and Royal Caribbean made yearly highs recently after Carnival announced their earnings. 

Slepko: Thank you for the candid insights into your trading and investment methods.  Now, let’s talk about your board.  Except for yourself, all your board members are outside, independent directors – and half are women, one of whom literally wrote the ($180!) book on auditing.

Herzfeld: Yes, Kay Tatum is a professor of auditing at the University of Miami and she’s also chaired their accounting department.  She’s wonderful, especially on the audits. I believe her book on audit committees is in its sixth edition currently.  Among other activities she serves on [the American Institute of Certified Public Accountants’] Auditing Standards Board which sets the auditing standards for non-pubic entities. 

Our board is quite special in many ways.  And unlike most closed-end funds, the Fund’s advisor, Thomas J. Herzfeld Advisors, does not control the board of directors of the Herzfeld Caribbean Basin Fund. Of the five board members, four are independent. I am the only insider.

Over sixteen years, the board has changed.  Three of my original board members have passed away since the inception of the Fund.

Felix Granados had been involved in building pipelines in Cuba – and had even been in the same class as Fidel Castro.  Felix abandoned his property and business in Cuba, came to the United States, formed a construction company, and started building homes and shopping centers in Florida.  His son and grandson now run his company and they are the kind of people I would like to invest with in a Free Cuba.

Ken Trippe was a lawyer by education and had been treasurer of a US conglomerate, and that conglomerate bought a Swedish shipping company that he became president of which led to him joining the board of Royal Caribbean – where he was involved in hiring the current leadership of that firm.

Bergthor Endresen was a Norwegian that I first met socially.  Berg fled the Nazis in World War II. [NS: So, he had that shared experience with other political refugees.] And joined the [British Royal Air Force], and later became the personal pilot to the King of Norway.  He later formed an aerospace parts business with offices in over fourteen countries.  Before we had all the rules and regulations here [in America], we would take the boat out to Bimini, and in about an hour we’d be having lunch in the Bahamas…I could tell you a lot of stories about him, but suffice it to say: Berg was quite a hero. 

It is unfortunate that these directors didn’t live to see a Free Cuba.

We have an excellent board now, too.  Kay I’ve mentioned.

Mike Rubin is an international lawyer, and he’s been on the board since 2002. He’s also been on the board of one of the portfolio holdings in Puerto Rico [Margo Caribe].

Ann Lieff I’ve known for forty years.  Her specialty is retailing.  She was president of Spec’s Music Stores, which at one time had eighty stores in Florida and Puerto Rico.  She’s been on the boards of several public companies including a large furniture company Furniture Brands International and jewelry retailer Birks & Mayors.  She’s had a great career.

Our most recent director to join is John Gelety.  He spends a lot of time handling international transactions in Latin America and has been a great addition. John is an accomplished corporate attorney whose practice focuses on counseling international and domestic commercial clients in all aspects of business law.  Prior to establishing his own firm in 2005, Mr. Gelety was an associate general counsel of a private equity firm with offices in New York and Florida.  Prior to going in-house, Mr. Gelety worked as an associate attorney in the business and finance departments of Steel Hector & Davis in Florida, and Hogan & Hartson in Maryland.

I rely on the board heavily to guide me with their suggestions.

Slepko: Has there been a time when the board has changed your mind on a policy or position?

Herzfeld: Direct private investment is the area I’ve relied on my board the most for guidance.  We look at a lot of very speculative companies when it comes to investing directly in some of the Cuba plays.  There have been times when we’ve debated making certain direct private investments, and they have suggested more conservative, wait-and-see approaches.  In most of these cases, I’m glad I put my foot on the brake.

Slepko: So, are you sometimes a little too enthusiastic?

Herzfeld: Well, the question comes up – and I ask it all the time too – when is the embargo going to be lifted?  How many years will it be?  What percent of our money do we want in start-up companies earmarked Cuba?  I’ve put some of those investment ideas on the table as it gets closer, and I’m glad we’ve done that because the embargo has been in place a lot longer than I ever thought it would.

Slepko: It must be killing the Miami-businessmen that you talk with that don’t want anything to do with Cuba while there’s the embargo.

Herzfeld: The Cuban people, including the exiles, have suffered a great human tragedy over the Castro decades. I understand how they feel. And yet, I think many have very developed plans for post-embargo Cuba.  I know some of my consultants are working with a number of Cuban-Americans on their business plans for Free Cuba.  Those people are reluctant to talk about it because it’s so politically charged and also, of course, they don’t want their competitors to know what their plans are.

Slepko: You had mentioned in the past that the Motley Fool had written a few articles and had gotten [CUBA] wrong.

Herzfeld: I don’t remember the articles exactly, it may have been someone else, but I believe they knocked the fund and said something along the lines of there isn’t much of a Cuba play in the portfolio. That article was written without talking to me.

Slepko: After contacting all the companies even remotely connected to Cuba investment, I’m just happy someone’s still talking to me.

Herzfeld: Bad articles don’t bother me all that much. It gives the long-term shareholders (including me) an opportunity to buy the stock on weakness. I believe in the Fund.  Indeed, my family is the Fund’s largest investor.




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