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Cuba – A Broad Based Investment Approach

|Includes: Herzfeld Caribbean Basin Fund (CUBA)

President Obama has boldly grabbed the initiative in opening negotiations to restore full diplomatic relations and make way for the lifting of the decades-old embargo with Cuba. In my SA article on November 6, 2014 entitled "Venezuela Vulnerabilities - U.S. and Cuba Unlikely Market Bedfellows" I discussed the closing window of opportunity for President Obama and Raul Castro to establish their political legacies to lift the embargo. Obviously they've taken advantage of that opportunity.

The obstacle President Obama faces is that the Republicans are in control of both Houses and no major Republican candidate has advocated lifting the embargo. Congressional approval is required for such to occur. However with his surprise announcement, President Obama has effectively blindsided the GOP which will be forced to perform an about face on the issue for one reason: trade with Cuba is a powerful job creator. Cuba is a country in a 1950s time-warp and requires considerable industry-wide assistance. This means a huge demand from American businesses to bring Cuba into the 21st century.

With respect to a broad investment strategy the closed-end fund The Herzfeld Caribbean Basin Fund (NASDAQ:CUBA) listed in NASDAQ Capital Market provides such a strategy. Their investment strategy is long-term capital appreciation in the Caribbean Basin.

According to their June 2014 Annual Report, the fund's geographic allocations are U.S. (52%), Mexico (20%) and Panama (11%), and the remainder are in Caribbean countries Cayman, Bahamas, Colombia and Puerto Rico.

With respect to industries, the largest of their schedule of investments include airlines (7.8%), banking & finance (9.8%), communications (9.4%), construction & related (9.4%), food, beverages & tobacco (14.3%), housing (5%) and leisure (14.5%). These represent a broad-based, high demand areas for good & services in Cuba.

The downside to these industries may be in the food and beverages sector. Cubans have very little disposable income thus such sales will not be robust. The only short-term beneficiaries would be limited to American visitors.

The commonalities between a closed-end fund (NYSEMKT:CEF) and an open-end fund (mutual fund) are that both are professionally managed and offer a diversification of investments.

The key differences are that a CEF has a fixed capital structure and a finite number of shares outstanding at the time of IPO and remains constant (thus "closed"). Additionally a CEF not required to buy back from investor upon request; another investor must be found willing to purchase those shares. An open-end fund continually offers shares to investors and their shares are highly liquid, redeemable on a daily. For this reason, this is why investment opportunities in this CEF may not be available in the near future.

As a long-time investor in CUBA I can attest through experience that there has been, at times, high volatility. However, with an historic restoration of diplomatic relations between the U.S. and Cuba, I fully expect that there will be strong upward progressive growth with the expected occasional hiccups after the initial euphoria has worn off.

CUBA pricing should reach another level after the demise of both Castros and a younger leadership who have less emotional connection to the revolution, takes the reins.

Additionally I participated in a brief panel discussion on the international talk show Fresh Outlook on December 20 on Cuba's renewed relations with the U.S. with a former American diplomat with South American postings and a media expert who provided a general overview of the future political and commercial potential.

Disclosure: The author is long CUBA.