BUSINESSWEEK ONLINE : FEBRUARY 12, 2001 ISSUE
FINANCE

A Nice Little Place in the Sun


You might think the epicenter of the closed-end-fund world lies in lower Manhattan, near Broad and Wall Streets, where most of them trade. Nope. You'll find it instead 13 miles south of Miami in a big, three-story house behind a thick white wall with no sign, not even an address. Inside, past a late-model Cadillac and an orange Corvette, is the workaday lair of Thomas J. Herzfeld, Mr. Closed-End Fund.

Herzfeld personifies these eccentric little investments not just by virtue of his longevity--he has been trading them going on 33 years--but by his ubiquity. One of his firms was the first broker explicitly to focus on closed-ends. Another manages its own closed-end, Herzfeld Caribbean Basin. A third runs private accounts (current minimum: $1 million) while also publishing a newsletter, the closed-end bible. It posts the Herzfeld Closed-End Averages.

Herzfeld credits the first of his six books, 1979's The Investor's Guide to Closed-End Funds, with gaining him guru status. ''When I first got started in closed-ends, I read his book,'' says Adam G. Shapiro, principal of Advantage Capital Management, a $65 million firm competing with Herzfeld's. ''He's a very smart guy.'' Herzfeld himself isn't entirely sure: ''The trouble with me personally is that I'm an idiot savant,'' he says. ''This is the only thing I know how to do.''

SIX BINDERS. Not long ago, only doing closed-end funds seemed like a first-class ticket straight to the bottom of Lake Okeechobee. Investors were beyond dismay at seeing their shares persistently trade at discounts, and new issues had all but ended. But sticking to his own little niche keeps paying off for Herzfeld. He has $100 million under management, on which he charges 1% to 2% a year. Although the $9 million Caribbean Basin Fund sank 29% in 2000, it's up nearly 20% so far this year, and Morningstar Inc. gives its longer-term record a middling grade. Last year, his advisory business had its best returns ever: The U.S. equity portfolio was up nearly 50%, his muni-bond portfolio 35%.

How does he operate? His trading desk, with a trio of big computer screens staring at him, looks at first like many up north on Wall Street, where he started in 1968 as a broker-trainee. But spend some time by his side and you'll see that his method is more abacus than algorithm.

Each trading day, Herzfeld works his way through six unwieldy seven-ring gray binders, plotting by hand the action in each of the more than 500 closed-end funds. Every chart displays two lines, one for the fund's net asset value, the other for its market price. If the market price is below NAV, the fund trades at a discount. Steep discounts make Herzfeld's eyes zoom in. ''To oversimplify, buy when discounts are wide and sell when they narrow,'' he says. ''If a fund is worth $10 and it sells at $8, it doesn't take a lot of complicated analysis.''

Late last year, Herzfeld found just such an opportunity in shares of meVC Draper Fisher Jurvetson Fund I. A venture-capital portfolio, it went public in June at $20 a share. By December, it had sunk to less than half that, even though it had a NAV of $18.58, with $11.40 in cash. Herzfeld bought heavily at an average cost of $10.81. Trading recently below $13, a 31.8% discount to NAV, it's still a steal in his view.

Herzfeld doesn't work alone. But his staff of five, including Cecilia L. Gondor, an associate of 17 years, and his wife, Rutli, who oversees the mom-and-pop shop, is unusually small. That keeps the closely held firm's costs down and profits up. Herzfeld betrays no interest in selling out, as open-end fund guru A. Michael Lipper did, to Reuters Group, in 1998. ''Then we would have to work for somebody,'' he says. ''We're just real happy the way things are.'' With the average account up 6.8% so far in 2001, clients must be, too.

By Robert Barker in Kendall, Fla.

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