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Closed-end Cuba fund planned

Major fund companies are not likely to embrace Cuba as the antidote to the outflow of assets from their equity funds, but one Miami-based company hopes to be the first into a market it believes is destined to take off.

Thomas J. Herzfeld Advisors, Inc., has filed with the Securities and Exchange Commission to offer The Cuba Fund, a closed-end fund that would invest in "Cuban-related securities," including the stocks of firms now permitted to do business in the country, according to the company's SEC filing.

For now, that universe of investments includes telecommunications and mail companies doing business in Cuba. The fund plans to invest directly in Cuban companies and others doing business with Cuba if U.S. travel and trade restrictions with the country are loosened or dropped. U.S. law currently prohibits direct or indirect investment in Cuba, with some limited exceptions.

Thomas J. Herzfeld, president of the advisory firm, declined to comment on the proposed Cuba fund while its registration statement is being considered by the SEC. Herzfeld's firm, however, serves as the adviser to the Herzfeld Caribbean Basin Fund, Inc., with $7.9 million in assets, another closed-end fund investing a portion of its assets in companies allowed to do business in Cuba as well as in other Caribbean markets.

"When the embargo is lifted, there will be an explosion of growth in Cuba," said Herzfeld in an interview.

The Caribbean Basin fund was trading at a discount to net asset value of 12.6 percent as of Oct. 9, according to Lipper Analytical Services, Inc. That is the smallest discount as of October 9th of the 12 closed-end Latin American Funds that Lipper tracks. The fund's one year cumulative total return through October 9, down 27.42%, also was the best among closed-end Latin American Funds. The average of that group was negative 50.55%, according to Lipper. Investors in the Caribbean Basin fund will be able to buy shares in the Cuba fund at a lower sales commission than other investors, according to the SEC filing. Herzfeld said Caribbean Basin fund investors include individuals and businesses in the Florida Cuban-American community.

There may be a market for the Cuba fund among that group, but there are dangers in investing in a Cuban fund, said Bill Rocco, an international analyst at Morningstar, Inc. While the markets in the Caribbean region offer opportunities to invest in companies whose stock is not widely followed by analysts, there are not many public companies that are actively traded. Rocco suggested that investors may be better off either purchasing a Latin American fund which has some Caribbean exposure or investing directly in the companies themselves.

"These markets are not really on anybody's radar screen," Rocco said. "I just don't see what the point" is in an exclusively Cuban or Caribbean fund.

Funds such as the Cuba and Caribbean funds, however, convey the message that the fund manager and investors are "on the cutting edge of markets" which will develop, Rocco said. That is the point, according to Herzfeld. The registration statement said the Cuba fund intends to invest in companies likely to benefit "from political, legal and economic developments" in Cuba.

"There will be enormous capital flowing into Cuba" once the trade embargo is lifted, Herzfeld said.