Our Cuba fund is off to a great start – but I think the best is yet to come

Cuba is opening up to American companies. That’s great news for the fund James McKeigue tipped six months ago.

150706-cuba

Cuba is opening up to American companies

Sometimes when you invest in a stock, you worry if external forces are going to blow an otherwise good company off course. History's full of dramatic examples: the Russian oil industry, before it got nationalised by the Soviet Union; or expensive ocean liners, built just before the advent of commercial air travel.

But, very rarely, sometimes it feels as though history is on your side. As if an irrevocable tide of events is pushing your stock upwards. And that's exactly how I feel about our Cuba tip - the Herzfeld Caribbean Basin Fund (Nasdaq:CUBA).

The fund is up 13% since I first tipped it back in January, and looks set to benefit as more good news comes from the CubaUS love story. Now it's time to take another look at the rapprochement and see if we can expect more.

Coming in from the cold

Right from the beginning, this story has been more about excitement and future potential than cold hard facts. If you look at the simple facts, then Cuba's tiny $68bn economy barely registers among the range of options available to US firms. But the country is hugely symbolic. Its plucky defiance against its huge neighbour made it a constant thorn in the side for America. So the rapprochement carries a lot of symbolism for both parties.

The island also holds a lot of potential. Sixty years or so ago, before Fidel Castro's revolution, Cuba received more US foreign direct investment ($320m) than the rest of Latin America combined. It's unlikely to regain that position, but it still has a lot to offer US firms.

Cuba's location and climate make it attractive to the huge American tourist market. That's why we've seen American airlines, hotel groups and even short-term house rent specialist, Airbnb, already signal their interest.

Cuba's creaking agriculture system, transport infrastructure and telecoms network also offer big opportunities for international investors. Cuba may not be a big country, the population is under 12 million, but because nearly all of the economy is under state control at the moment, that means there is a lot that could be opened up to US firms.

History is on our side

And now moves have started towards rapprochement, it's hard to see them being stopped. Sure, there are critics in the US. Some Republicans are against the move, saying that they worry about Cuba's human rights record. One recently described Cuba as a "thuggish regime". This is quite a statement when you consider that America's foreign policy over the last 15 years has led to the death of hundreds of thousands of people, while Cuba's biggest foreign intervention was helping to contain Ebola in West Africa. But ultimately these critics are fighting a losing battle. They may manage to delay or inconvenience the process but they can't stand in the way of history.

I think our tip is the best way to play Cuba

Herzfeld Caribbean Basin Fund

Nasdaq:CUBA

The fund invests in regional companies that would benefit from a resurgent Cuba. So it owns regional carrier Copa which readers will know is one of my favourites and should benefit if there is a tourist boom in Cuba. Other holdings include Royal Caribbean Cruises, regional fizzy drink producer Coca Cola Femsa, and regional cement producer Cemex.

And while the fund still isn't permitted to own anything directly in Cuba yet, its founder has promised to start investing directly as soon the rules are relaxed further and he is allowed to.

Since tipping the fund, I've noticed that it acts as a barometer of progress in the rapprochement. When there is some good news for example Cuba being taken off the US State Sponsors of Terrorism list our fund climbs. When there is some bad news for example some Republicans looking to block the appointment of a new US Ambassador to Cuba it falls.

That might seem pretty obvious but it's very useful because there aren't actually any other Cuba pure plays'. You can be clever and invest in firms that you think will benefit, but ultimately Cuba will be a very small part of their overall revenues, so they won't act as a Cuba pure play and react in the same way this fund does.

So if, like me, you think this story is only going to go one way in the long term, then this fund is the perfect vehicle to take you for the ride.

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