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Investing in a post-Fidel Cuba

Dan Grech Dec 1, 2006

KAI RYSSDAL: Tomorrow’s going to be a big day in Havana. Cubans will celebrate the 50th anniversary of the start of the revolution that brought Fidel Castro to power. And although he’s too sick to take part, Saturday will wrap up five days of festivities marking Castro’s 80th birthday.

He’s been sick for a while. Four, five months now. And that’s only fueled speculation about what comes next for the island. There is talk of more of the same, with Fidel’s brother Raul in charge. But some Cuban exiles in Miami are banking that once Fidel dies, there will be business to do. From the Marketplace Americas Desk at WLRN, Dan Grech reports.

DAN GRECH: For nearly 44 years, Americans have been barred from investing in Cuba. One man has found a creative way to bet on an end to that ban.

THOMAS HERZFELD: My name is Thomas Herzfeld. I am president of the Herzfeld Caribbean Basin Fund, and the Cuba Fund.

Herzfeld doesn’t invest directly in Cuba. That would be illegal. But he does invest in companies that will boom when the embargo is lifted:

HERZFELD: Construction, leisure, of course, railroad holdings, retail, trucking and marine freight. That’s very interesting, the trucking and marine freight. We have a position in a small company, Trailerbridge. Trailerbridge operates ships and trucks and they put their trucks on the ships.

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.

Herzfeld is based in Miami. The city’s filled with hard-line Cuban exiles who hate Castro. Once, before a speech, a man walked up to Herzfeld and told him to stop what he was doing or else.

Now Herzfeld’s business address is a PO box.

In November, Herzfeld held a shareholder meeting at an undisclosed location. It lasted 4 minutes, 22 seconds.

HERZFELD: Is there any business to come before the meeting?

SECRETARY: Chairman, there is none.

BOARD MEMBER: I’m from Florida. I demand a recount.

No shareholders showed up to the annual meeting. Not because they fear being targeted. Herzfeld doesn’t get threats anymore. Shareholders didn’t show up because they don’t have much to complain about.

Over the past 12 years, the fund’s share price has climbed 80 percent. And a search by Bloomberg News ranked the Herzfeld fund number two in the world for Latin America over the month of November.

Washington slapped an embargo on Cuba in 1963, when Castro started nationalizing U.S. companies. Nearly four decades later, the embargo is still in place, and may even outlast Castro.

So how has Herzfeld managed to make money?

HERZFELD: We wanted to pick companies which we thought would do well, even if there was no change relating to the embargo. And those companies have done very well indeed.

The Herzfeld fund trades as CUBA on the Nasdaq. It’s relatively small, with just $14 million in holdings. But it turns out new investors are dying to get a piece of the action. Herzfeld’s turned away half a billion dollars in additional financing.

He does this even though managing more money would bring him hundreds of thousands of dollars in additional fees.

HERZFELD: It’s more about excellence than fees. We want to get it right. The more money an investment manager has to manage, the more difficult it is for him. You become a bull in a china shop if you get too large.

Cecilia Gondor has worked with Herzfeld for 23 years.

CECILIA GONDOR: Tom is a quiet genius.

She says he carefully researches every move he makes.

GONDOR: He always can go right to that heart of the matter and say this is where the emphasis has to be.

The Herzfeld fund began trading in 1994, on May 20th — Cuban Independence Day — with an appropriate initial value of $5.20. It hit a record $9.50 after Castro went to the hospital with an intestinal ailment in August.

GONDOR: What surprised me is that we’ve had to wait so long. When we started the fund, we though it’d be a few years. But it’s been a long time.

Herzfeld, in financial parlance, continues to go long with his investments. He’s says he’s prepared to keep waiting.

In Miami, I’m Dan Grech for Marketplace.

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