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This fund manager has been ready to invest in Cuba for 2 decades

·West Coast Correspondent

story is part of a weeklong Yahoo series marking one year since the opening of relations between the United States and Cuba.

"To the Cuban people, America extends a hand of friendship," President Obama said nearly a year ago. It was the first time in 53 years that the U.S. would re-establish diplomatic relations with Cuba.

Since 1961, the U.S. has had no formal business presence on the Communist island 90 miles off the coast of Florida. The Kennedy administration imposed a complete economic embargo on Cuba, which restricted all travel and trade, and ultimately resulted in the loss of $1.12 trillion over 50 years. But two decades before Obama’s monumental declaration, there was one man who was quietly charting the course for economic opportunity in an area others weren’t interested in.

Tom Herzfeld moved to Miami in 1975 after running his own investment firm in New York. There he created the only publicly traded investment company based in the Caribbean, the Herzfeld Caribbean Basin Fund, which trades on the Nasdaq under the symbol CUBA.

The fund invests in companies that benefit from economic, political, structural and technological developments in the Caribbean, including Cuba, as well as Jamaica, the Bahamas, Dominican Republic, Mexico and Costa Rica.

Source: Brigitta Herzfeld
Source: Brigitta Herzfeld

From one family business...

Though now he runs his own boutique investment management firm, for a while Herzfeld was preparing to run his family’s textile business in New York. He even got a B.S. from the Philadelphia College of Textiles and Science (now known as Philadelphia University) to acquire the skills necessary to take over the company from his father.  

But after completing his service in the army he decided to change course and head to Wall Street. He started his career in 1968 as a trainee at Reynolds and Company, which eventually merged with Dean Witter, which was then folded into Morgan Stanley.

Herzfeld, 70, had always been interested in the market and started trading stocks in high school, though he felt like he was at a disadvantage because he had no formal financial background. Luckily for him, Reynolds had a training program. He was intrigued by the financial world and found one area particularly compelling: closed-end funds.

“Closed-end funds were a very small industry in the 1960s. There were only 60 funds with $8 billion in total assets and they were very overlooked,” Herzfeld says. “I found the concept of a closed-end fund easy to understand. I could do the math -- essentially, they allow people to buy assets at a discount.”

A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an IPO. The fund is then listed and traded like a stock and actively managed. Unlike open-end mutual funds, closed-end funds issue a set number of shares from the start and the value of those shares is based on demand. As of the end of 2014, the U.S.’s 568 closed-end funds had total assets of $289 billion.

At the time Herzfeld became interested in them, closed-end funds were considered uncharted territory. "They were very much overlooked,” he says.

While Herzfeld was embarking on his journey into capital markets, his family sold the textile company because he decided not to stay in the business.

Young and ambitious

Within two years of working at Reynolds, Herzfeld accrued enough wealth and clientele to team up with two other partners to form a NYSE member firm called Carlino, Herzfeld and Kemm. At 25, he served as the firm’s senior partner and was believed to be the youngest managing partner of a NYSE member firm at the time.

After several years there, Herzfeld, who had spent many winters in Florida with his family, decided to move to Miami in 1975 with his wife and 2-year-old son.

“We were starting to trade larger and larger positions and it was getting to be a bit too stressful,” he says. Using his extensive knowledge of closed-end funds, Herzfeld wrote the first textbook on the topic, “The Investor’s Guide to Closed-End Funds,” and in 1984 founded Thomas J. Herzfeld Advisors. In 1994 he created the Herzfeld Caribbean Basin Fund.

The path to CUBA

With more than 1 million Cuban-Americans, making up 18% of the city’s total population, Cuban culture is an essential part of Miami. Herzfeld attributes his own financial interest in Cuba to a conversation he had with his daughter, Brigitta, when she was in fourth grade. “A lot of her friends were Cuban-Americans and she’d tell me about their big, beautiful homes. She knew from her friends and their parents that many of them had to leave a lot behind in Cuba and became successful business people in the U.S. She was really impressed and told me that I should really engage with this Cuban-American community,” he says.

Herzfeld created CUBA at a precarious time, to say the least. In 1992 Congress passed the Cuban Democracy Act. The law reinforced sanctions on Cuba so long as the Cuban government refused to move toward democratization and greater respect for human rights. And while he could not invest directly in Cuba, he invested in companies that had exposure to the island, particularly tourism, cruise lines, construction, telecom, hospitality and building materials.

CUBA’s top holdings include Royal Caribbean Cruises (RCL), homebuilder Lennar (LEN), construction company MasTec (MTZ), Norwegian Cruise Lines (NCLH), Latin American airline company Copa Holdings (CPA), Seaboard (SEB), Consolidated Water (CWCO), and Carnival (CCL).

Source: Brigitta Herzfeld
Source: Brigitta Herzfeld

‘So much has changed yet nothing has changed’

“Though it was unclear to us when trade would resume again, we knew that when it did happen there would be a boom in the region,” Herzfeld says. “Our first investments were in companies that would do well even if there were no political or economic change.”

Initially Herzfeld’s fund focused solely on “high quality, large companies with strong balance sheets.” He enlisted help from a former Cuban vice minister who defected in 1993 and remains a close advisor to get a sense of on-the-ground sentiment. Now, post-Obama’s announcement, he says the firm has been looking at both public and private companies that would benefit from a boost in the Cuban economy -- startups as well as various projects and investments that would improve trade, infrastructure and the standard of living in the country.

Shares of CUBA spiked as much as 35% on Dec. 17, 2014, in response to the announcement of normalized relations. Though the fund has underperformed recently -- shares are down 25% this year -- they’re up 12% since going public in 1994. One point of concern is that the fund trades at a 20% premium to its net asset value (NAV).

Herzfeld remains ever optimistic that thawed relations will only mean further ways to invest in the country. “I never really considered myself as smart, but I was smart enough to be first in closed-end funds and in Cuba,” says Herzfeld. Cuba is just one of many countries within the CUBA fund, but he says it has the most potential.

In fact, since Obama’s announcement, Herzfeld says several private companies and individuals have contacted him looking for insights and guidance on tapping into a new market. Most notably, short-term rental service Airbnb, which has 3,000 listings in Cuba, approached Herzfeld Advisors before the company launched on the island in April. “They were in our offices and we told them a little about the infrastructure challenges and risks,” he says.

After doing a lot of consulting for others, Herzfeld plans to focus more on his own firm’s investments now. 

Brigitta Herzfeld, 37, is managing director and head of client relations at Herzfeld Advisors. “The phone was ringing off the hook for several weeks following the announcement,” she says. “This was a project that we’ve been working on for 20 years and all of a sudden everyone is interested. From our perspective, so much has changed, yet nothing has changed.”

It’s all in the family (business)

Despite its longevity, Herzfeld Advisors remains small. It currently has a relatively modest market cap of $38.75 million and 10 employees (two of whom are his children).

“Because I was expected to take over a family business of my own, I’ve always been sensitive about the idea of a family business,” Herzfeld says. His son, Erik, 42, was promoted to co-president this July -- a move Herzfeld says is the first step in realizing his plan to retire.

Both Erik and Brigitta explored other options within finance before joining their father’s firm. Though the journey was circuitous, Brigitta describes it as inevitable. “I’ve been groomed to go into this business since I was born. It was part of our dinner conversation since I was an infant and it’s a family obligation I owe to my dad to take on his legacy and build it further,” she says.

Herzfeld says he’s beyond confident that his children will lead the firm to the next level. “They have grad degrees from good business schools and experience at top Wall Street firms, unlike me. I trade stocks like a musician who plays by ear. They are classically trained musicians with the talent and the knowledge,” he says. (Both have MBAs from MIT’s Sloan School of Management and worked at Lehman Brothers. Brigitta worked at Goldman Sachs and Erik at JPMorgan.)

But ultimately, Brigitta says she and her brother were drawn to the family business, but she wants to set the record straight.

“It’s not as glamorous as people think. The big misconception is that you’re set for life and that if you’re in finance, it’s cushy and you automatically get paid well and you don’t have to work that hard. My dad works 7 days a week,” she says. “And you have to make sure you’re keeping your employees happy, your clients happy, and of course there’s your reputation that you don’t want to risk. You want to preserve your image because it’s your name on the door.”

With Brigitta having planted the seed for CUBA in the first place, it seems only fitting that she take the helm as the country opens up and becomes ripe for new investment. “Cuba was an enigma -- it was out of sight and out of mind,” she says. “But because we live in Miami, we always know Cuba’s constant conversation, by default almost. It will always be an area we want to focus on.”


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