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Castro's
health points the way for fund
By John Waggoner, Gannett
News Service. Asbury
Park Press, May 6, 2007.
Some stocks - and the mutual funds that
own them - rise and fall in response to
earnings or new-product announcements. Then
there's the Herzfeld Caribbean Basin Fund
(ticker: CUBA). It tends to gain and drop
according to the health of Cuban leader
Fidel Castro.
On Tuesday, when Castro failed to make
an appearance at May Day celebrations in
Havana, the Herzfeld fund soared 11.8 percent.
This closed-end fund, which trades on the
Nasdaq exchange just as stocks do, invests
in stocks that stand to gain once the United
States lifts its trade embargo against Cuba.
The fund's share price has been tightly
correlated with Castro's health for the
past year, rising when news reports have
indicated that the Cuban leader is gravely
ill and falling when there are signs of
his recovery. Castro temporarily stepped
down as president on July 31 last year after
emergency surgery, naming his brother, Raul,
as acting president. The fund's share price
leaped 12.8 percent the next day.
Castro met with President Hugo Chavez of
Venezuela on Jan. 30. From that point until
early last week, the fund plunged 21 percent
on speculation that Castro had recovered.
Thomas Herzfeld, the fund's manager, started
the fund in 1994, figuring that the U.S.
trade embargo, which began in February 1962,
would eventually end. "The vast majority
of stocks we invest in should do well when
trade resumes with Cuba," he says.
One example: Trailer Bridge, which puts
trucks on ships and delivers them from Florida
to Puerto Rico. The company has shallow-draft
vessels, which would work well in Cuba.
Cuba has only three deep-water ports, Herzfeld
says.
Another example: Florida East Coast Industries,
a railroad company whose rail lines could
enjoy substantially improved business if
the Cuban trade embargo ended.
Of course, there are no guarantees that
the U.S. trade embargo will end with Castro's
death. His brother, Raul, the effective
leader of the country, has made few changes.
But some Cuba experts think Raul Castro
would encourage a more open trade policy
once Fidel Castro dies.
The United States will be looking for progress
in several areas before it ends the embargo,
Herzfeld says, including a restoration of
human rights and, possibly, compensation
to U.S. citizens for property seized by
the Cuban government. "No one single
event could more lead to the end of the
embargo than the passing of Fidel Castro,"
Herzfeld says.
The Herzfeld Caribbean Basin Fund has gained
a sizzling 158 percent in the past three
years, vs. 34 percent for the Standard &
Poor's 500-stock index. But before you place
any bets on Castro's death, be aware: This
fund isn't cheap.
Closed-end funds issue a set number of
shares. And their market price often doesn't
reflect the current value of their portfolio.
For example, the Herzfeld Caribbean Fund's
share price is now 26.2 percent higher than
the value of the stocks it owns. In other
words, it sells at a premium to its holdings.
If the fund were to sell all its holdings
and distribute them to shareholders, the
shareholders would receive far less money
per share than the current share price would
indicate.
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