Cuba-focused closed-end fund rallies in wake of Castro's death

November 28, 2016 2:19 PM EST

A Cuban flag flies overhead as people wait in line to pay tribute to Cuba's late President Fidel Castro in Havana, Cuba, November 28, 2016. REUTERS/Carlos Barria


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By David Randall

NEW YORK (Reuters) - The only Cuba-focused stock fund in the United States rallied more than 13 percent Monday, a sign investors expect Fidel Castro's death to continue to open up relations between the United States and the island country despite President-elect Donald Trump's threat to end the normalization process that began under President Obama in 2014.

Thomas Herzfeld, who manages the $39.1-million Herzfeld Caribbean Basin fund, said in an interview that he saw the President-elect's message as "the start of negotiations."

"He's the consummate businessman and it sounds to me like he expects the Cuban government to make some changes, but I don't see him reversing what Obama did," he said.

Trump posted on Twitter Monday morning that "If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate the deal."

The sharp jump in the value of shares of Herzfeld's fund is more a reflection of investor sentiment than the fundamentals of the companies he owns. Unlike mutual funds or exchange-traded funds, which have an unlimited availability of shares and trade based on the underlying value of their assets, closed-end funds trade based on the supply and demand of a fixed number of shares, like stocks.

In one sign of the surge into his fund, shares of the Herzfeld Caribbean Basin fund now trade at a 4-percent discount to their net asset value versus a 14-percent discount late Friday, according to Thomson Reuters data.

At the same time, its top holdings - infrastructure construction company MasTec Inc, regional airline Copa Holdings SA, and cruise line operator Royal Caribbean Cruises Ltd - each fell by 1 percent or more Monday.

Herzfeld is focusing most of his portfolio on infrastructure, tourism and freight companies that he expects to benefit as Cuba's economy opens up to outside businesses. His fund, which charges an above-average 3.2 percent in annual expenses, is up 27.3 percent year-to-date, in large part because of a bet on infrastructure holdings that rallied following Trump's surprise victory on Nov. 8.

"We bought these companies expecting that the entire country of Cuba would have to be rebuilt. Now with President Trump's victory we have the potential to rebuild not only Cuba but the U.S. as well," he said.

His top holding, construction company MasTec Inc, is up 25.5 percent since Election Day, while another large holding, Mexican-based cement company Cemex SAB de CV, is down 11.5 percent over the same time on concerns that the new Trump administration will raise protective trade tariffs on imports.

He has also increased his bets on companies that stand to benefit from increased business in Cuba itself. Marine transport company Seaboard Corp is up nearly 39 percent for the year, while shares of Marriott Vacations Worldwide Corp are up 44 percent over the same time.

Herzfeld said he hoped Cuba would release political prisoners before Trump takes office in January to give a strong signal that it plans to work closely with the incoming administration.

"You would then have a clear view that things are on track to normalizing relations," he said.

(Reporting by David Randall; Editing by Nick Zieminski)



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