[GRAPHIC]
[ALL STAR LOGO]
ANNUAL REPORT 2002
A CLEARLY DEFINED PROCESS FOR CORE EQUITY INVESTING
LIBERTY ALL-STAR EQUITY FUND
[GRAPHIC]
A SINGLE INVESTMENT...
A DIVERSIFIED CORE PORTFOLIO
Only one mutual fund offers:
- A diversified, multi-managed portfolio of growth and value stocks
- Exposure to all of the industry sectors that make the U.S. economy the
world's most dynamic
- Access to institutional-quality investment managers
- Objective and ongoing manager evaluation
- Active portfolio rebalancing
- A quarterly fixed distribution policy
- The power of more than $850 million in assets
- Listing on the New York Stock Exchange (ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: FEBRUARY 2003
Equity investors are no doubt deeply disappointed with 2002, and we at
Liberty Asset Management Company (LAMCO) share their sentiments. The hope
generated in the fourth quarter of 2001 and early 2002 gave way to a brutal
six-month period in which the S&P 500 Index gave up 13.4 percent in the June
quarter and 17.3 percent in the September quarter. The positive returns of
the fourth quarter were small compensation for a brutal year -- simply too
little, too late. For Liberty All-Star Equity Fund shareholders, it was much
the same, as the table below indicates. The Fund posted a solid fourth
quarter, but suffered through the same trying market conditions that tested
equity investors throughout 2002 and the two prior years.
FUND STATISTICS
PERIODS ENDING DECEMBER 31, 2002 4TH QUARTER 2002
----------------------------------------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND
Year End Net Asset Value (NAV) $7.14
Year End Market Price $6.64
Year End Discount 7.0%
Distributions Declared $0.19 $0.88
Market Price Trading Range $5.80 to $7.69 $5.80 to $12.39
Premium/(Discount) Range (7.5)% to (0.1)% (7.5)% to 20.4%
PERFORMANCE SUMMARY RATES OF RETURN
-----------------------------------------------
PERIODS ENDING DECEMBER 31, 2002 4TH QTR. 2002 3 YEARS* 5 YEARS*
----------------------------------------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at NAV 9.2% (25.2)% (11.3)% (1.7)%
Shares Valued at NAV with Dividends Reinvested 9.4% (25.0)% (10.7)% (1.2)%
Shares Valued at Market Price with Dividends Reinvested 3.5% (33.0)% (5.7)% (2.6)%
Lipper Large-Cap Core Mutual Fund Average 6.6% (23.5)% (15.1)% (1.7)%
Category Percentile Ranking (1=best; 100=worst) 9th 67th 14th 43rd
S&P 500 Index 8.4% (22.1)% (14.6)% (0.6)%
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in the Fund's
rights offerings were exercised. Figures shown for the unmanaged S&P 500 Index
are total returns, including income. Past performance cannot predict future
results.
*Average annual returns.
1
As has been well documented, 2002 was the third consecutive down year
for the stock market, the first time that has occurred in more than 60 years
(the last being 1939 -- 1941). For investors with long memories, 2002 was the
sharpest decline since the bear market of 1973 -- 1974. Moreover, it was the
only year in recent memory in which all 11 S&P 500 sectors declined. Looking
back over the three-year bear market, THE WALL STREET JOURNAL estimates that
investors have suffered paper losses of some $7 trillion since the market
peaked in March 2000.
I take no delight in citing these statistics. I would much rather talk
in positive terms and the day when I can do that is surely coming. I believe
that excesses are being wrung from the system and the stage is being set for
a return to a more normalized environment. Most strategists do not expect
anything like the heady years of the latter 1990s -- and that's all the
better. Investors would welcome a steadier, more stable environment.
Let me turn to Liberty All-Star Equity Fund and address the performance
table that accompanies this letter, including the fourth quarter and
full-year 2002 as well as our three- and five-year performance. The
three-year period of 2000 -- 2002 covers essentially the entire bear market
that began in the first quarter of 2000. The five-year figures include both
rising and falling markets. We have also listed our ranking within the Lipper
Large-Cap Core Mutual Fund Average for each of these periods.
Our good fourth quarter 2002 performance, I am pleased to report, ranked
the Fund in the 9th percentile of its comparable peer group, the Lipper
Large-Cap Core Mutual Fund Average (the "Lipper universe"). In other words,
it was ahead of 91 percent of comparable funds. The story was less
satisfactory for 2002 as a whole, when the Fund only managed to finish in the
67th percentile, a ranking in which we are disappointed. I will discuss some
reasons for that result momentarily. Next, let me point out that over the
three-year bear market period -- painful as it has been -- the Fund finished
in the 14th percentile of the Lipper universe, a ranking with which we are
pleased, given the severity of this bear market. Meanwhile, for the five-year
period the Fund was in the 43rd percentile.
Returning to the Fund's performance for 2002, I believe our standing in
the Lipper universe can be attributed to a few factors. First, our managers
stuck to their disciplines and didn't chase performance by drifting from
their respective growth or value styles. One can win short term with that
strategy, but over time it is difficult to do with any consistency. Second,
some previously fast growing technology stocks entered the realm of value
stocks owing to the multi-year sell-off; when they did, our value managers
(being forward looking, as all our managers are) increased their exposure to
the technology sector. However, they were not rewarded, as negative sentiment
continued to dominate the sector. Third, the stock market experienced a
historically high level of individual stock volatility. If an active
investment manager was overweight (relative to the index) in a stock that
sold-off significantly, the consequences were harsh.
The last point to touch on from the table is the difference between the
net asset value and market price returns. Over any discrete period, a
closed-end fund may be at a premium or discount. For example, the Fund's
market price return outperformed the net asset value return for the trailing
three years but lagged for the fourth quarter and full year of 2002. Much of
that recent lag can be attributed to the Fund going from trading at a premium
to trading at a discount.
[SIDENOTE]
"...OVER THE THREE-YEAR
BEAR MARKET PERIOD --
PAINFUL AS IT HAS BEEN --
THE FUND FINISHED IN
THE 14TH PERCENTILE OF
THE LIPPER UNIVERSE..."
[END SIDENOTE]
2
The widening of the discount was not unique to the Fund, as discounts
widened in general for closed-end funds as the year drew to a close. However,
the ebb and flow of premiums and discounts, albeit volatile, tend to even out
over longer periods of time.
We at LAMCO are pleased with the Fund's structure and the investment firms
we have in place. The principle of multi-management underlying the Fund is as
sound as the day the Fund commenced operations in 1986. I believe the Fund's
longer-term performance supports that belief, as does our above-average
performance through what is arguably the most punishing bear market in many
generations. In that regard, I invite you to focus on two features of this
Annual Report: an overview of LAMCO's investment process, which begins on the
next page, and our traditional Manager Roundtable, which begins on page 12. I
believe the investment process feature illustrates how LAMCO adds value for
shareholders, while the Manager Roundtable takes you inside the thinking of the
Fund's portfolio managers.
As investors, we are challenged to look beyond the difficulties of the past
three years. I am confident in the Fund, its structure and LAMCO's commitment to
retaining and working with top quality investment managers. On behalf of the
entire LAMCO team, I would like to take this opportunity to thank you for your
patience and continuing support of the Fund. As always, we will continue to work
in the best long-term interests of All-Star shareholders.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
3
LAMCO'S INVESTMENT PROCESS
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Fund Objective
Liberty All-Star Equity Fund is designed as a core domestic equity holding. In a
single investment, the Fund provides investors with access to a diversified
portfolio utilizing an investment approach called multi-management, which is
widely practiced by large institutional investors such as endowments,
foundations and pension plans. Multi-management is intended to result in more
consistent and less volatile investment performance over changing market cycles
than the use of a single manager. The Fund's Advisor, Liberty Asset Management
Company (LAMCO), employs a rigorous due diligence process to select independent,
institutional-quality investment management firms that practice a distinct style
for managing equity portfolios. LAMCO can be totally objective about the
managers it selects because it has no affiliation or alliances with the
investment managers selected for the Fund. LAMCO's role is to identify and
retain best-of-breed investment managers and to blend their individual styles to
form a core domestic equity holding.
4
AS ADVISOR TO THE ALL-STAR EQUITY FUND, LIBERTY ASSET MANAGEMENT
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Fund Structure
Liberty All-Star Equity Fund is a multi-managed fund in which five investment
managers practice the two primary styles of investing -- value and growth -- as
well as variations within each style. Because investor sentiment historically
shifts between value and growth, LAMCO's skill in blending the two styles can
reduce volatility and enhance consistency of returns over time. Typically, value
style managers focus on companies with attractive prospects that are trading at
relatively low multiples of earnings, sales and book value. Growth managers
generally focus on companies with higher expected sales and earnings growth
which are leaders in expanding sectors of the economy. In addition to being
multi-managed, the Fund is closed-end, meaning that it has a fixed number of
shares that trade on the New York Stock Exchange. This structure allows the
investment managers to pursue long-term goals without the distraction of daily
sales and redemptions that can occur at inopportune times.
5
COMPANY (LAMCO) ADDS VALUE FOR INVESTORS BY PRACTICING A WELL-
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Manager Selection
Manager selection is a key element in our process. There are thousands of
investment managers to choose from. LAMCO calls on the expertise of its
professional staff, state-of-the-art analytical tools and years of experience in
the investment industry to select investment managers for the Fund. In many
cases, these are institutional investment managers not accessible to individual
investors. In selecting investment managers for the Fund, LAMCO conducts
in-depth research and rigorous due diligence. We focus on the "four Ps" ... that
is, each manager's philosophy, process, people and performance. We seek
investment management firms that have demonstrated a consistent application of
their style (instead of abandoning their style when it is temporarily out of
favor) and a clearly-articulated, disciplined investment process. We also want
to see a well-managed organization and continuity among a firm's investment
professionals.
6
DEFINED AND DISCIPLINED INVESTMENT MANAGEMENT PROCESS.
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Manager Monitoring
Constant vigilance enables LAMCO to ensure that each investment manager is
performing up to expectations and that each is contributing to the Fund. Like
all businesses, investment management firms can change over time. Ownership and
key personnel can change. Market pressures may cause a firm to deviate from its
investment style and strategy. Often times, individual investors may have
difficulty knowing that the fund manager with whom they originally invested has
changed. LAMCO's active monitoring guards against that. As investment managers
analyze stocks, we analyze the managers for the investment characteristics of
their holdings, consistent adherence to their style, investment performance and
continuity of key decision makers. When warranted, LAMCO replaces managers. This
has happened 11 times during the Fund's 16-year history.
7
LAMCO BRINGS OBJECTIVITY, EXPERIENCE AND EXPERTISE TO
[GRAPHIC]
Portfolio Rebalancing
Portfolio rebalancing maintains the Fund's structural integrity through time and
is also a well-recognized risk management tool. Systematic rebalancing keeps the
Fund's assets equally divided among its five investment managers. Owing to
shifting market sentiment and their differing styles and strategies, the
managers will perform differently over time. This can unbalance the portfolio;
for example, at any one time causing the growth managers to account for a larger
share of the portfolio or vice versa than the value managers. When this happens,
LAMCO takes assets from the outperforming managers and gives it to those who
have underperformed. While this seems counterintuitive, it is really a case of
taking money from today's winners and redeploying it among tomorrow's. Once
again, this is a practice that individual investors may not discipline
themselves to perform, but which LAMCO practices consistently.
8
CONSTRUCTING AND MONITORING A MULTI-MANAGED PORTFOLIO, AND
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Distribution Policy
Since 1988, LAMCO has followed a policy of paying annual distributions on common
shares at a rate of approximately 10 percent of the Fund's net asset value (paid
quarterly at 2.5 percent per quarter). Because a portion of the portfolio is
turned over when an investment manager is replaced (often generating realized
capital gains), the Fund's multi-management investment approach and the payout
policy complement one another and provide a systematic mechanism for
distributing funds to shareholders.
DIVIDEND REINVESTMENT
LAMCO recognizes the diverse needs of the Fund's shareholders. Some investors
prefer their dividends in the form of cash. Others reinvest their dividends in
additional Fund shares, thus letting their dividends compound over time.
SHAREHOLDER SERVICES
LAMCO rounds out its process by providing a range of shareholder services, such
as the Web site www.all-starfunds.com and communications, including press
releases, monthly updates, quarterly reports and toll-free shareholder
assistance.
9
IS DEDICATED TO THE LONG-TERM SUCCESS OF FUND SHAREHOLDERS.
MULTI-MANAGEMENT HAS PRODUCED MORE CONSISTENT RETURNS
The narrative on the preceding six pages is intended to focus on the highlights
of LAMCO's investment process for Fund shareholders. This chart demonstrates the
long-term outcome of the investment process and the Fund's multi-management
structure. Most mutual funds are run by a single portfolio manager or a team of
managers pursuing a particular investment style, whether it's growth or value.
But styles go in and out of favor. A style that outperforms on a relative basis
one year may disappoint the next, leading to higher volatility.
As discussed in our Investment Process feature, LAMCO utilizes multi-management,
that is, combining managers who practice different investment styles to reduce
volatility while producing competitive returns.
All-Star's long-term track record provides clear testimony to the value of
the multi-management strategy. The chart below demonstrates that since
All-Star's first full calendar year of operation 16 years ago, the Fund has
achieved better-than-average returns and better-than-average consistency
compared with peer funds in the Lipper Large Cap Core universe.
[CHART]
HIGH CONSISTENCY
HIGH RETURN
LOW CONSISTENCY
LOW RETURN
All-Star's high return
and high consistency
combination is
well-placed among the
universe of open-end
Large-Cap Core funds
Each dot represents the 16-year return and consistency record ending December
31, 2002, of each fund in the universe of 52 open-end Large-Cap Core equity
mutual funds (as classified by Lipper, Inc.) that has a 16-year history.
Consistency is measured by the volatility of "non-market" monthly returns,
calculated by subtracting the return of the S&P 500 Index from each mutual
fund's return. The lower the volatility, the higher the consistency of results
compared with the stock market.
10
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S ASSETS ARE EQUALLY DISTRIBUTED AMONG THREE VALUE MANAGERS
AND TWO GROWTH MANAGERS:
[PIE CHART]
SCHNEIDER CAPITAL MANAGEMENT
VALUE/Companies that are
overlooked and undervalued
where the firm expects a
rebound in earnings.
BOSTON PARTNERS ASSET
MANAGEMENT, L.P.
VALUE/Companies with low
price-to-earnings and
price-to-book ratios
where a catalyst for
positive change has
been identified.
OPPENHEIMER CAPITAL
VALUE/Companies that
exhibit the ability to
generate excess cash flow while
earning high returns on invested
capital that trade below their
intrinsic value.
MASTRAPASQUA ASSET
MANAGEMENT, INC.
GROWTH/Companies whose
valuations do not reflect the
potential for accelerated earnings
and cash flow growth.
TCW INVESTMENT
MANAGEMENT COMPANY
GROWTH/Companies that
have superior sales growth,
leading and/or rising market
shares, and high and/or
rising profit margins.
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN
PORTFOLIO CHARACTERISTICS:
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of a
multi-managed portfolio. The characteristics are different for each of the
Fund's five investment managers. These differences are a reflection of the fact
that each pursues a different investment style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Stock Index.
INVESTMENT STYLE SPECTRUM
[BAR CHART]
VALUE GROWTH
PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 2002
(UNAUDITED)
BOSTON OPPEN- MASTRA- TOTAL S&P
SCHNEIDER PARTNERS HEIMER PASQUA TCW FUND 500 INDEX
-------------------------------------------------------------------------------------------------------------------------
Number of Holdings 49 34 38 46 27 165 500
Percent of Holdings in Top 10 45% 45% 52% 31% 54% 21% 24%
Weighted Average Market
Capitalization (billions) $8 $38 $51 $36 $57 $38 $76
Average Five-Year
Earnings Per Share Growth (1)% 12% 11% 17% 21% 13% 10%
Dividend Yield 1.5% 1.5% 2.0% 0.4% 0.3% 1.1% 1.8%
Price/Earnings Ratio 13x 15x 14x 25x 31x 18x 19x
Price/Book Value Ratio 1.5x 2.8x 3.3x 3.7x 5.1x 3.3x 4.1x
11
MANAGER ROUNDTABLE
AS THE LATE `90S WERE STRONG, THE EARLY `00S HAVE BEEN WEAK. IN BOTH CASES, SAY
THE MANAGERS, EXCEPTIONAL FORCES SHAPED THE MARKETS. WHAT BRINGS STOCKS BACK TO
`NORMAL' -- AND WHEN?
THE PERFORMANCE OF THE STOCK MARKET in 2002 belied the headlines: record low
interest rates, higher productivity, good consumer spending, strong home
construction, an absence of inflation and reasonable -- if uneven -- economic
growth. What happened? Corporate capital spending remained weak. But the news
that truly shaped the business page was more likely to be found on the front
page: corporate wrongdoing and accounting scandals compounded by international
tensions and terrorist fears. Finally, still in the background was the shadow of
the excessive late `90s. In this Manager Roundtable, All-Star's investment
managers analyze the year just past as well as the three-year bear market. And,
they speak to their outlook for the future and what actions they'll be taking in
2003. The Fund Manager, Liberty Asset Management Company (LAMCO), serves as
moderator for the Roundtable. The participating portfolio managers and their
investment styles are:
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGERS' VIEWS AT THE TIME
OF THE DISCUSSION (JANUARY 2003) AND ARE SUBJECT TO CHANGE.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
PORTFOLIO MANAGER/Mark E. Donovan, CFA, Chairman, Equity Strategy Committee
INVESTMENT STYLE/Value -- Boston Partners invests in undervalued companies that
have sound business fundamentals and positive business momentum. The firm
searches for companies with low price-to-earnings and price-to-book value ratios
where a catalyst for positive change has been identified.
MASTRAPASQUA ASSET MANAGEMENT, INC.
PORTFOLIO MANAGER/Frank Mastrapasqua, Chairman and CEO
INVESTMENT STYLE/Growth -- Mastrapasqua uses proprietary screens, in-house
research and direct contact with managements to select growth companies with
compelling valuations. Mastrapasqua focuses on companies with proven
competitive advantage and profitability records. A proprietary risk-adjusted
price-to-earnings ratio is computed and compared to an independently derived
long-term earnings growth rate. Companies selected for investment have
projected growth rates that exceed the risk-adjusted price-to-earnings ratio.
OPPENHEIMER CAPITAL
PORTFOLIO MANAGER/ John G. Lindenthal, Managing Director
INVESTMENT STYLE/Value -- Oppenheimer invests in the stocks of quality
companies with sound business prospects that are considered undervalued.
Research focuses on cash flow analysis. Purchase candidates exhibit a high
return on equity, large undedicated cash flow and reasonable prices in
relation to intrinsic value.
SCHNEIDER CAPITAL MANAGEMENT
PORTFOLIO MANAGER/Arnold C. Schneider III, CFA, President and Chief Investment
Officer
INVESTMENT STYLE/Value -- The firm practices a disciplined fundamental
approach to add value over time. Research focuses on uncovering new ideas in
the belief that the broader market is slow to react to change, particularly
where out-of-favor stocks are concerned. Owning these stocks before they
experience a rebound in earnings and come to the attention of other investors
creates the opportunity for price appreciation before fundamentals warrant
the stock be sold.
TCW INVESTMENT MANAGEMENT COMPANY
PORTFOLIO MANAGER/Glen E. Bickerstaff, Managing Director U.S. Equities
INVESTMENT STYLE/Growth -- TCW invests in companies that have superior sales
growth, leading and/or rising market shares, and high and/or rising profit
margins. Its concentrated growth equity strategy seeks leading companies with
distinct advantages in their business model and an inherent edge over their
competitors. Research plays a critical role in the selection process, and the
investment horizon is long term.
LAMCO: With 2002 in the history books, how would you recap the year for
equity investors? Glen Bickerstaff, start us off, please.
BICKERSTAFF (TCW -- GROWTH): After the terrorist attacks of 2001 we had hoped
the economy and stock market would normalize. However, as the year progressed
the investing public was hit with several high profile
[SIDENOTE]
"FEAR OF TERRORISM AND LACK
OF TRUST FOR CORPORATE
AMERICA WERE CLEARLY THE
CULPRITS BEHIND STOCK PRICE
DECLINES FAR EXCEEDING ANY
EARNINGS SHORTFALLS DURING
THE YEAR."
FRANK MASTRAPASQUA,
MASTRAPASQUA ASSET MANAGEMENT
(GROWTH)
[END SIDENOTE]
12
examples of corporate malfeasance and investor confidence was shaken. Clearly,
there was more damage done to the markets than to the economy, as consumer
spending held up. Consumer spending benefited from monetary ease that enabled
mortgage rates to fall to levels not seen in 30 years. However, corporate
spending was very weak, particularly in the manufacturing sectors. In this
environment, equity investors, who did not abandon the stock market, sought safe
harbors. These are often high dividend-yielding, slow growth companies in mature
businesses that traded at low valuations. Thus for the third year in a row value
outperformed growth.
LAMCO: John Lindenthal, how does a value manager sum up 2002?
LINDENTHAL (OPPENHEIMER -- VALUE): The year was simply full of pitfalls for
equity investors. Two thousand two was dominated by headline risk related to
corporate governance, balance sheet and earnings issues. Risk was not rewarded
and both equity and fixed income investors were penalized if they held high risk
positions. The rewards were mostly with the high-quality, strong balance sheet
franchises.
LAMCO: Mark Donovan, how does Boston Partners reflect on the year?
DONOVAN (BOSTON PARTNERS -- VALUE): While this past year was plagued with
many pitfalls, not the least of which was corporate malfeasance, 2002 was
primarily a continuation of the unwinding of prior excesses. Although the
process has been painful, the end result should introduce a new set of
opportunities. Boding well for investors in 2003 will be greater transparency
in corporate accounting and closer scrutiny of compensation packages. As the
system is cleansed through tougher audits, criminal trials and SEC
investigations, there should be a renewed confidence in the equity markets.
This will be a slow process, but the end result will be positive for
investors.
LAMCO: Frank Mastrapasqua, what are your thoughts?
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT -- GROWTH): The first several
days of the year made 2002 look like it would represent a solid continuation
of fourth quarter 2001 gains. Unfortunately, the still-skittish market --
primarily the result of the terrorist attacks -- offered little respite
during a precipitous decline. For most of the year, it was mainly due to
numerous corporate accountability scandals. The benefits of economic
recovery, profit recovery, low interest rates, high productivity realizations
and business spending improvement were not translated into valuation
appreciation. Fear of terrorism and a lack of trust in corporate America were
clearly the culprits behind stock price declines far exceeding any earnings
shortfalls during the year. As the year approached its end, geo-political
risks (i.e., a potential war with Iraq, diplomatic trouble with North Korea
and an oil production shut-down in Venezuela) and deflation fears adversely
impacted oil prices and investor psychology. In spite of periodic rallies,
the media's intense focus on the numerous uncertainties left market
participants frightened and unwilling to make long-term equity commitments.
In that environment, bond and money market instruments are the assets of
choice.
LAMCO: Arnie Schneider, this is your first All-Star Equity Fund Manager
Roundtable, so we've let you off the hook until last.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT -- VALUE): There is no way to gloss over
the fact that 2002 was an ugly year for stocks -- all sectors, all market caps
and all investment styles. Despite the fourth quarter gains, U.S. equity markets
suffered their sharpest yearly decline since the 1970s. A silver lining in the
gray clouds is that last year's market setback makes valuations look more
reasonable relative to the outlook for corporate earnings growth over the next
three to five years.
LAMCO: Looking back a little further, what's your longer-term perspective on
2000, 2001 and 2002? Is it primarily a case of the air being let out of the
bubble... or is there a more fundamental underlying shift influencing equities?
Arnie Schneider, we'll ask you to go first this time.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT -- VALUE): There are numerous external
factors that sparked the market's slide and prolonged it. However, we believe
the primary cause was the deflation of the speculative bubble that sprung its
first leak in March 2000. The equity market has appeared to us to be sagging for
almost three years under the weight of lofty valuations and unattainable
expectations. The corporate scandals,
[SIDENOTE]
"THIS [2000 -- 2002] WAS NOT
YOUR TYPICAL PERIOD OF MARKET
REVALUATION. THIS WAS THE
100-YEAR FLOOD. ALTHOUGH
INVESTOR CONFIDENCE HAS
BEEN IMPACTED, MUCH IS BEING
DONE TO CORRECT THE ECONOMY
AND THE MARKETS."
GLEN BICKERSTAFF,
TCW (GROWTH)
[END SIDENOTE]
13
geopolitical scene, terrorism and recession factors, although serious, were
secondary.
LAMCO: Let's stay with the value managers. Mark Donovan and John Lindenthal,
what do you see as you look back?
DONOVAN (BOSTON PARTNERS -- VALUE): Investors have lost sight of the longer-term
aspects of investing. Although we may be unsure of what the future may hold,
looking beyond the last few years reveals that the longer-term averages are what
they should be. Let's put recent market performance in perspective: The
three-year annualized return of the S&P 500 at the end of 1999 was 27.6 percent,
a little excessive -- yet many expected this to continue. The three-year
annualized return of the S&P at the end of 2002 is now negative 14.6 percent --
unattractive but not surprising given the prior three years. Combining the two
gives us a six-year annualized return of 4.4 percent, not something to get
excited about but hardly a reason to call for the end of the modern economy.
Taking a longer-term perspective -- which is what we are supposed to do -
the eight-year return for the S&P 500 is 10.3 percent, right in line with the
longer-term historical norms. Had investors been told in 1995 that the S&P 500
would return 10 percent on an annualized basis by the end of 2002, we believe
they would have been pleased. What we couldn't have told them is how we would
get to that 10 percent -- by experiencing some very strong years followed by
three weak years. In the end, however, it all washes out and we are reminded
that investing is a long-term process.
LINDENTHAL (OPPENHEIMER -- VALUE): Certainly the bubble that was starting to
burst in early 2000 and that generally lasted until possibly October of 2002 was
the big story over this time period. On top of that phenomenon, the continuation
of the globalization of both markets and industries is a significant fact for
investors to consider. Worldwide competition has kept a pricing lid on most
products, and has driven the need to cut costs and improve productivity. This
trend should continue until we see better revenue growth.
LAMCO: Glen Bickerstaff, how does a growth manager analyze the past three years?
BICKERSTAFF (TCW -- GROWTH): As they say, hindsight is 20/20. During the late
`90s there was a speculative fervor built around the prospects of the Internet
changing many aspects of commerce. At the time we did not buy into the hype, as
most of these Internet companies did not possess profitable business models. As
the mania came to an end, its impact was felt broadly. In 2000, we avoided
telecommunication services companies that were on course to over expand while
destroying their profitability through price competition. And technology names
were expensive, so we reduced our holdings to below market weight. The markets
could have recovered; however, investors were then exposed to some significant
shocks. Fed rate hikes slowed the economy, terrorist attacks demoralized the
nation and then came the episodes of accounting fraud, corporate greed and
deception and "Wall Street" transgressions. This was not your typical period of
market revaluation. This was the 100-year flood. Although investor confidence
has been impacted, much is being done to correct the economy and the markets.
LAMCO: Frank Mastrapasqua, what's your growth manager's view on the three-year
bear market?
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT -- GROWTH): Rather than looking at
the performance between 2000 and 2002 as a result of a broken bubble or as a
secular shift, the period is best described as transitional. Contributors to
unsustainable equity valuations were clearly Y2K spending excess and frenzied
excitement over the advent of Internet-based business tools on the heels of a
nine-year secular bull market. The sharp contraction in business capital
spending marked the peak of the equity market and the beginning of this
transition period where Internet technology has been transferred from the hands
of entrepreneurs to mainstream business. This fundamental shift is very positive
for the equity market over the long-term, as companies increase productivity and
cut costs by reformulating traditional business practices around the concept of
real-time management of operations, sales, back office and finance.
LAMCO: Turning to 2003, insofar as the investment outlook is concerned, what
causes you the most concern and what gives you the most cause for optimism?
And comment, please, on whether you think the S&P 500 is overvalued or
undervalued. Mark Donovan, what are your thoughts?
DONOVAN (BOSTON PARTNERS -- VALUE): Looking ahead, we see reasons to be
concerned and reasons to be optimistic. Concerning us most, apart from
continued
[SIDENOTE]
"TWO THOUSAND TWO WAS
DOMINATED BY HEADLINE RISK
RELATED TO CORPORATE GOVERNANCE,
BALANCE SHEET AND EARNINGS
ISSUES. [TAKING] RISK WAS NOT
REWARDED ..."
JOHN LINDENTHAL,
OPPENHEIMER (VALUE)
[END SIDENOTE]
14
terrorist threats and a possible war, is very simply the lack of growth in
profitability within corporate America. The equity markets will not sustain
higher levels until companies are able to return to an upward trajectory in
reported earnings. The good news, and a reason for optimism, is that the low
level of interest rates, combined with aggressive balance sheet restructurings,
will begin to take hold and benefit profits. While lower interest expense and
continued cost cutting initiatives will aid profits, we remain skeptical of the
many forecasts calling for sharp revenue growth. We see few industries with any
level of pricing power, and even fewer where there is a strong case to be made
that a high level of pent-up demand exists.
At current levels we believe the S&P to be at the higher end of "fairly"
priced; thus we do not believe it to be undervalued. One opportunity that we
face as investors has been created by the compression in valuations over the
past three years. The blatantly expensive stocks, many of which traded at over
100x earnings, have dropped significantly while many of the "old-economy"
stocks, which had been trading at 8 to 10 times earnings, have increased. The
vast majority of stocks in the large cap universe now trade in the range of 14
to 22 times earnings. Although many of the traditional value stocks have risen
in valuation during this timeframe, a new set of substitutes has entered our
universe. Many of the so-called "fallen angels" may deserve their current lower
multiples, but it is our task to identify those that may soon rise again. As
such, our goal has been to invest in higher quality companies within our
universe and avoid lower quality names that are trading at similar multiples.
LAMCO: Let's hear from the other value managers, Arnie Schneider and John
Lindenthal.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT -- VALUE): We believe that the severe
market drop during the first nine months of 2002 brought the broad U.S. equity
indexes into fairly valued territory in the context of an outlook for benign
inflation, moderate interest rates and normal corporate profit growth.
As the mild 2001 recession fades in the rear-view mirror, the U.S. economy
should grow at a moderate rate and at a more even pace in 2003. However, we
expect that the growth rate will continue to be below the historical averages
for past recoveries. The manufacturing sector should turn around in 2003 and
lead to a modest revival in business capital spending as firms allocate a
portion of their improved profits to rebuild depleted inventories, replace aging
plants and equipment, and initiate overdue information technology projects.
A big concern is that the gloomy economic climate in Europe could constrain
or derail the U.S. recovery. Fiscal and monetary policy in the Eurozone remains
too tight to boost demand. Corporate restructuring is proceeding too slowly in
the face of high and rising labor costs. Germany, which accounts for 30 percent
of Eurozone GDP, may be on the verge of a recession. The stronger euro and
recent surge in oil prices impose a drag on growth. If the European economies
stall in 2003, the U.S. recovery could be placed in jeopardy.
LINDENTHAL (OPPENHEIMER -- VALUE): Based on current earnings estimates for 2003,
the S&P 500 is fairly valued. The basis for optimism is that the aggressive cost
cutting in corporations, together with the fiscal and monetary stimulus in
place, causes earnings to be better than the current $50+ expected for the S&P
500 in 2003. The main concern is still that business spending remains mired down
because of the overspending during the bubble period. Consumer spending may slow
down from last year's pace. Of course, international events cannot be predicted
but, obviously, tensions remain high.
LAMCO: Turning to the growth managers, what are you seeing as you look ahead?
BICKERSTAFF (TCW -- GROWTH): We do not invest based on forecasts. Rather, we
focus on companies that we believe possess sustainable competitive advantages
that are selling products into growing, addressable markets. Long term, we
believe that these businesses will create shareholder value that will overpower
an economic forecast. Concerns about a war with Iraq or escalating tensions with
North Korea appear to be in stock prices already. There is much talk about the
risk of deflation, but it is important to disaggregate what is happening to
goods prices (which are falling) versus services prices (which are rising).
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT -- GROWTH): Even though the Iraq and
North Korea confrontations loom large on the minds of investors, periodic
rallies show that investor focus is returning to fundamental analysis. Two
thousand three should see the continued healthy return of capital spending that
coincides with a continued recovery in corporate profits.
[SIDENOTE]
"THERE ARE NUMEROUS EXTERNAL
FACTORS THAT SPARKED THE
MARKET'S SLIDE AND PROLONGED
IT. HOWEVER, WE BELIEVE THE
PRIMARY CAUSE WAS THE DEFLATION
OF THE SPECULATIVE BUBBLE
THAT SPRUNG ITS FIRST LEAK
IN MARCH 2000."
ARNIE SCHNEIDER
SCHNEIDER CAPITAL MANAGEMENT
(VALUE)
[END SIDENOTE]
15
Cost cutting has built in a new element of unprecedented operating leverage that
should surprise investors with above-expected realized profits. On a P/E basis
the S&P 500 appears overvalued, but earnings will most likely surprise on the
upside, as has usually happened during the early stages of economic and profit
recovery. This earnings outcome will likely turn out to be reevaluated in light
of stronger than expected potential for the year as a whole. Other key drivers
for growth equities in 2003 include: the economy being in its fifteenth month of
recovery; corporate profits having risen for three straight quarters, with
expectations for growth to continue accelerating through 2003; accelerating
capital spending on equipment and software over the past two quarters; and the
lowest interest rates in 41 years. Of course, the market will certainly be set
back by any unexpected and formidable terrorist act upon the United States.
LAMCO: To wrap it up, from the perspective of your style and strategy, what will
you be focusing on during the year ahead? Let's hear from the growth managers
first.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT -- GROWTH): Technology,
advertising, financial services and transportation should be among the
leading sectors of the recovery. Our focus will be to ensure that our
participation in these groups is consistent with an acceptable risk/reward
balance. In addition, there will be focus on emerging sectors in which we may
want to increase our exposure, as well as continued attention to weeding out
the underperformers.
BICKERSTAFF (TCW -- GROWTH): We continue to employ our time-proven approach.
We maintain a concentrated, conviction-weighted portfolio of companies that
we believe can dominate attractive business segments. As in the past, we own
leading companies in technology, health care, financial services and consumer
sectors. Our technology holdings were challenged in a very difficult business
environment, but they have distinguished themselves from their competitors
and the long-term case for their business is compelling. Our health care
names stand to benefit from new product releases. Our financial and consumer
names are doing well. We believe the portfolio is well positioned with
companies that have the means to demonstrate superior cash flow growth in an
understandably skeptical stock market.
LAMCO: And, how about the value managers? What will you be concentrating on
as the year unfolds?
DONOVAN (BOSTON PARTNERS -- VALUE): Looking ahead, we see better
opportunities in the lower capitalization range of the large cap universe,
primarily around $10 billion. Although the valuation discrepancy between the
mega-caps and mid- to large-cap companies that existed a few years ago has
narrowed, one still exists and we plan to take advantage of the opportunities
when we are able to do so. As part of our fundamental analysis of potential
purchases, we review all balance sheets and income statements in detail,
including a careful review of all footnotes and disclosures. We look for
companies with manageable debt loads, stable and rising free cash flow,
attentive management, and a visible earnings stream.
LINDENTHAL (OPPENHEIMER -- VALUE): No matter what the environment, we always
focus on owning good businesses at reasonable prices. In terms of our value
style, we still believe that patience will be rewarded and there will be
opportunities to be more aggressive over the balance of the year.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT -- VALUE): Throughout a market cycle,
the nature of our deep value investment process leads us to invest in
companies that are, as a group, more economically sensitive than the
benchmark index. At the peak of the profit cycle, we moderate the economic
sensitivity where we can, and at the bottom of the profit cycle we accentuate
it where we find promising investment opportunity. We expect that a continued
modest recovery in 2003 will benefit many cyclical industries whose fortunes
are tied in part to the growth of the U.S. economy.
The portfolio is focused on companies where the recent profit picture is
bleak, stock prices are severely depressed and investor expectations are very
low, but where we have identified internal or external factors that will
spark an earnings recovery. In this vein, the portfolio is overweighted in
undervalued economically sensitive stocks in areas such as semiconductors and
semiconductor equipment, technology outsourcing services, domestic natural
gas, trucking, and selected agricultural-related markets.
LAMCO: Many thanks to all for some very interesting and insightful
discussion.
[SIDENOTE]
"HAD INVESTORS BEEN TOLD IN
1995 THAT THE S&P 500 WOULD
RETURN 10% ON AN ANNUALIZED
BASIS BY THE END OF 2002...
THEY WOULD HAVE BEEN
PLEASED. WHAT WE COULDN'T
HAVE [FORESEEN] IS HOW WE
WOULD GET TO THAT 10%..."
MARK DONOVAN,
BOSTON PARTNERS (VALUE)
[END SIDENOTE]
16
INVESTMENT GROWTH AS OF DECEMBER 31, 2002
[MOUNTAIN CHART]
NET ASSET VALUE OF SHARES INCLUDES ADDITIONAL
NET ASSET VALUE PER SHARE ACQUIRED THROUGH INVESTMENTS MADE
PLUS DISTRIBUTIONS PAID DISTRIBUTION REINVESTMENT THROUGH RIGHTS OFFERINGS
------------------------- ------------------------- ------------------------
31-Dec-86 9.11 9.11 9.11
31-Jan-87 10.17 10.17 10.17
28-Feb-87 10.87 10.87 10.87
31-Mar-87 11.08 11.09 11.09
30-Apr-87 10.77 10.77 10.77
31-May-87 10.86 10.86 10.86
30-Jun-87 11.31 11.32 11.32
31-Jul-87 11.81 11.82 11.82
31-Aug-87 12.28 12.39 12.39
30-Sep-87 11.8 11.94 11.94
31-Oct-87 9.24 9.12 9.12
30-Nov-87 8.51 8.32 8.32
31-Dec-87 9.08 9.01 9.01
31-Jan-88 9.47 9.45 9.45
29-Feb-88 9.82 9.85 9.85
31-Mar-88 9.51 9.51 9.51
30-Apr-88 9.52 9.52 9.52
31-May-88 9.48 9.47 9.47
30-Jun-88 9.85 9.95 9.95
31-Jul-88 9.75 9.83 9.83
31-Aug-88 9.54 9.58 9.58
30-Sep-88 9.9 10.05 10.05
31-Oct-88 10.05 10.23 10.23
30-Nov-88 9.92 10.08 10.08
31-Dec-88 10.11 10.33 10.33
31-Jan-89 10.65 11.01 11.01
28-Feb-89 10.49 10.81 10.81
31-Mar-89 10.64 11.04 11.04
30-Apr-89 11.05 11.56 11.56
31-May-89 11.44 12.07 12.07
30-Jun-89 11.35 11.99 11.99
31-Jul-89 12.09 12.98 12.98
31-Aug-89 12.31 13.26 13.26
30-Sep-89 12.35 13.38 13.38
31-Oct-89 12.14 13.09 13.09
30-Nov-89 12.25 13.25 13.25
31-Dec-89 12.35 13.44 13.44
31-Jan-90 11.79 12.66 12.66
28-Feb-90 11.88 12.78 12.78
31-Mar-90 12.13 13.18 13.18
30-Apr-90 11.99 12.98 12.98
31-May-90 12.91 14.3 14.3
30-Jun-90 12.96 14.42 14.42
31-Jul-90 12.93 14.38 14.38
31-Aug-90 12.15 13.22 13.22
30-Sep-90 11.69 12.58 12.58
31-Oct-90 11.67 12.55 12.55
30-Nov-90 12.23 13.41 13.41
31-Dec-90 12.59 14 14
31-Jan-91 13.04 14.71 14.71
28-Feb-91 13.71 15.76 15.76
31-Mar-91 14.1 16.41 16.41
30-Apr-91 14.03 16.3 16.3
31-May-91 14.54 17.12 17.12
30-Jun-91 14.04 16.32 16.32
31-Jul-91 14.52 17.12 17.12
31-Aug-91 14.56 17.19 17.19
30-Sep-91 14.76 17.54 17.54
31-Oct-91 14.95 17.86 17.86
30-Nov-91 14.35 16.84 16.84
31-Dec-91 15.89 19.5 19.5
31-Jan-92 15.69 19.15 19.15
29-Feb-92 15.46 18.75 18.75
31-Mar-92 15.52 18.86 18.86
30-Apr-92 15.62 19.04 20.95
31-May-92 15.72 19.22 21.14
30-Jun-92 15.47 18.76 20.64
31-Jul-92 15.92 19.58 21.55
31-Aug-92 15.44 18.7 20.58
30-Sep-92 15.94 19.63 21.6
31-Oct-92 16.04 19.81 21.81
30-Nov-92 16.17 20.06 22.08
31-Dec-92 16.54 20.75 22.84
31-Jan-93 16.62 20.91 23.01
28-Feb-93 16.46 20.6 22.67
31-Mar-93 16.78 21.22 23.36
30-Apr-93 16.45 20.57 22.64
31-May-93 16.55 20.77 22.86
30-Jun-93 16.85 21.36 23.52
31-Jul-93 16.83 21.32 23.47
31-Aug-93 17.02 21.71 23.9
30-Sep-93 17.35 22.38 24.64
31-Oct-93 17.4 22.48 26.25
30-Nov-93 17.17 21.99 25.68
31-Dec-93 17.41 22.47 26.24
31-Jan-94 17.78 23.27 27.17
28-Feb-94 17.35 22.34 26.09
31-Mar-94 17.12 21.82 25.47
30-Apr-94 17.2 21.99 25.68
31-May-94 17.07 21.71 25.34
30-Jun-94 17 21.52 25.12
31-Jul-94 17.3 22.2 25.92
31-Aug-94 17.76 23.27 27.16
30-Sep-94 17.46 22.57 27.85
31-Oct-94 17.63 22.96 28.34
30-Nov-94 16.94 21.36 26.35
31-Dec-94 17.27 22.18 27.36
31-Jan-95 17.41 22.51 27.78
28-Feb-95 17.5 22.73 28.04
31-Mar-95 18.08 24.12 29.77
30-Apr-95 18.23 24.49 30.22
31-May-95 18.38 24.86 30.67
30-Jun-95 19.03 26.47 32.66
31-Jul-95 19.45 27.53 33.97
31-Aug-95 19.24 27 33.32
30-Sep-95 19.82 28.51 35.17
31-Oct-95 19.7 28.2 34.79
30-Nov-95 19.81 28.48 35.14
31-Dec-95 20.08 29.19 36.01
31-Jan-96 20.44 30.14 37.19
29-Feb-96 20.62 30.61 37.78
31-Mar-96 20.76 30.98 38.23
30-Apr-96 20.99 31.61 39
31-May-96 20.96 31.53 38.9
30-Jun-96 21.17 32.15 39.67
31-Jul-96 20.52 30.33 37.44
31-Aug-96 20.62 30.61 37.78
30-Sep-96 21.63 33.48 41.31
31-Oct-96 21.8 33.96 41.91
30-Nov-96 22.58 36.28 44.78
31-Dec-96 22.31 35.52 43.83
31-Jan-97 23.01 37.6 46.4
28-Feb-97 22.91 37.3 46.03
31-Mar-97 22.41 35.79 44.16
30-Apr-97 22.87 37.19 45.9
31-May-97 23.45 38.96 48.08
30-Jun-97 24.31 41.62 51.36
31-Jul-97 25.29 44.68 55.15
31-Aug-97 24.34 41.71 51.48
30-Sep-97 25.36 44.92 55.44
31-Oct-97 24.86 43.31 53.46
30-Nov-97 25.21 44.45 54.88
31-Dec-97 25.37 44.98 55.53
31-Jan-98 25.35 44.91 55.45
28-Feb-98 26.45 48.63 60.03
31-Mar-98 27.2 51.19 63.21
30-Apr-98 27.33 51.64 63.77
31-May-98 26.45 48.6 62.44
30-Jun-98 27.19 51.29 65.88
31-Jul-98 26.89 50.22 64.51
31-Aug-98 24.23 40.76 52.36
30-Sep-98 25.37 44.88 57.65
31-Oct-98 26.21 47.96 61.6
30-Nov-98 26.5 49.02 62.96
31-Dec-98 27.67 53.47 68.67
31-Jan-99 27.72 53.66 68.91
28-Feb-99 27.24 51.85 66.59
31-Mar-99 27.75 53.86 69.17
30-Apr-99 28.56 56.98 73.19
31-May-99 27.96 54.67 70.21
30-Jun-99 28.88 58.38 74.98
31-Jul-99 28.27 55.96 71.88
31-Aug-99 27.48 52.83 67.85
30-Sep-99 27.48 52.91 67.95
31-Oct-99 28.14 55.6 71.41
30-Nov-99 27.92 54.7 70.25
31-Dec-99 28.86 58.93 75.68
31-Jan-00 28.39 56.95 73.14
29-Feb-00 28.26 56.4 72.44
31-Mar-00 29.65 62.65 80.47
30-Apr-00 29.48 61.92 79.52
31-May-00 29.22 60.79 78.08
30-Jun-00 29.62 62.71 80.54
31-Jul-00 29.51 62.22 79.91
31-Aug-00 30.12 64.94 83.4
30-Sep-00 30.15 65.25 83.8
31-Oct-00 30.33 66.07 84.86
30-Nov-00 28.89 59.48 76.39
31-Dec-00 29.87 64.1 82.33
31-Jan-01 30.03 64.86 83.29
28-Feb-01 28.93 59.74 76.72
31-Mar-01 28.09 55.67 71.5
30-Apr-01 28.99 60.03 77.09
31-May-01 29.09 60.5 77.7
30-Jun-01 28.88 59.46 76.36
31-Jul-01 28.6 58.07 74.58
31-Aug-01 27.9 54.89 70.5
30-Sep-01 26.7 48.73 62.59
31-Oct-01 27.08 50.68 65.09
30-Nov-01 27.97 55.25 70.96
31-Dec-01 28.11 55.99 71.91
31-Jan-02 27.89 54.83 70.42
28-Feb-02 27.56 52.94 67.99
31-Mar-02 28.11 55.9 71.79
30-Apr-02 27.58 53.05 68.13
9-May-02 27.37 51.92 71.88
31-May-02 27.3 51.65 71.51
30-Jun-02 26.44 46.9 64.93
31-Jul-02 25.65 42.53 58.89
31-Aug-02 25.65 42.56 58.91
30-Sep-02 24.85 38.02 52.63
31-Oct-02 25.42 41.25 57.11
30-Nov-02 26.02 44.75 61.95
31-Dec-02 25.48(1) 41.6(2) 57.59(2)
1. NAV of one share of All-Star as of 12/31/02 plus distributions paid since
inception.
2. To evaluate your investment in the Fund, these values should be used. Each
shows how an investment at NAV has fared by reinvesting the Fund's
distributions. The upper value includes additional investments made through
the rights offerings in 1992, 1993, 1994, 1998 and 2002.
The above chart illustrates the NAV growth of an original share of the Fund from
the Fund's inception date through December 31, 2002. The bottom region of the
chart reflects NAV growth assuming all distributions were received in cash and
not reinvested back into the Fund. The value of an original share grew to $25.48
(current NAV of $7.14 plus distributions paid since inception totaling $18.34,
which includes tax credits of $0.67 on retained capital gains).
Moving up the chart, the middle region depicts additional value added
through the reinvestment and compounding of distributions. The value of an
original share with distributions reinvested grew to $41.60 (5.827 shares times
the current NAV of $7.14).
On five occasions, the Fund has allowed the purchase of additional shares
at a discount through rights offerings. The top region illustrates the
additional value added assuming participation in all the rights offerings and
the reinvestment of all distributions. The value of an original share grew to
$57.59 (8.066 shares times the current NAV of $7.14).
17
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENTS
SHARES SHARES
SHARES PURCHASED ACQUIRED SHARES NAV(1) MARKET PRICE TOTAL MARKET
OWNED AT THROUGH THROUGH OWNED PER SHARE TOTAL NAV PER SHARE PRICE OF
BEGINNING PER SHARE REINVESTMENT RIGHTS AT END AT END OF SHARES AT END SHARES
YEAR OF YEAR DISTRIBUTIONS PROGRAM OFFERING OF YEAR OF YEAR OWNED OF YEAR OWNED
-----------------------------------------------------------------------------------------------------------------------------------
1987 1.000 $1.18 0.140 - 1.140 $7.90 $9.01 $6.00 $6.84
1988 1.140 0.64 0.107 - 1.247 8.29 10.34 7.25 9.04
1989 1.247 0.95 0.156 - 1.403 9.58 13.44 8.25 11.57
1990 1.403 0.90 0.167 - 1.570 8.92 14.00 7.75 12.17
1991 1.570 1.02 0.171 - 1.741 11.20 19.50 10.75 18.72
1992 1.741 1.07 0.199 0.179(2) 2.119 10.78 22.84 11.125 23.57
1993 2.119 1.25(3) 0.266 0.138(2) 2.523 10.40 26.24 11.125 28.07
1994 2.523 1.00 0.277 0.155(2) 2.955 9.26 27.36 8.50 25.12
1995 2.955 1.04 0.310 - 3.265 11.03 36.01 10.875 35.51
1996 3.265 1.31(3) 0.403 - 3.668 11.95 43.83 11.25 41.27
1997 3.668 1.69(3) 0.501 - 4.169 13.32 55.53 13.313 55.50
1998 4.169 1.40 0.487 0.173(2) 4.829 14.22 68.67 12.938 62.48
1999 4.829 1.39 0.569 - 5.398 14.02 75.68 11.063 59.72
2000 5.398 1.42 0.651 - 6.049 13.61 82.33 12.375 74.86
2001 6.049 1.20 0.703 - 6.752 10.65 71.91 11.09 74.88
2002 6.752 0.88 0.776 0.538(2) 8.066 7.14 57.59 6.64 53.56
1. Net Asset Value.
2. 1992: Rights offering completed in April 1992. One share offered at $10.05
for every 10 shares owned.
1993: Rights offering completed in October 1993. One share offered at $10.41
for every 15 shares owned.
1994: Rights offering completed in September 1994. One share offered at $9.14
for every 15 shares owned.
1998: Rights offering completed in April 1998. One share offered at $12.83
for every 20 shares owned.
2002: Rights offering completed in May 2002. One share offered at $8.99 for
every 10 shares owned.
3. 1993: Includes the $0.18 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price
of $11.125.
1996: Includes the $0.13 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price
of $11.25.
1997: Includes the $0.36 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price
of $13.313.
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its common shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES. If, for any calendar year, the total distributions
required by the 10 percent pay-out policy exceed the Fund's net investment
income and net realized capital gains, the excess will generally be treated as a
tax-free return of capital, reducing the shareholder's adjusted basis in his or
her shares. If the Fund's net investment income and net realized capital gains
for any year exceed the minimum amount required to be distributed under the 10
percent pay-out policy, the Fund may, in its discretion, retain and not
distribute net realized capital gains and pay income tax thereon to the extent
of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.
18
AUTOMATIC DIVIDEND REINVESTMENT & CASH PURCHASE PLAN (UNAUDITED)
Under the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to participate and have all their Fund dividends
and distributions automatically reinvested by EquiServe Trust Company, N.A., as
agent for participants in the Plan (the "Plan Agent"), in additional shares of
the Fund. For further information and enrollment forms, call Investor Assistance
at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 a.m. and 5 p.m. Eastern
Time.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee can participate in the Plan only if their brokerage firm, bank or
nominee is able to do so on their behalf. Shareholders participating in the Plan
through a brokerage firm may not be able to transfer their shares to another
brokerage firm and continue to participate in the Plan.
Under the Plan, distributions declared payable in shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional shares valued at the lower of market value or net
asset value per share on the valuation date for the distribution (but not at a
discount of more than 5 percent from market price). Distributions declared
payable only in cash will be reinvested for the accounts of participants in the
Plan in additional shares purchased by the Plan Agent on the open market at
prevailing market prices. If, prior to the Plan Agent's completion of such open
market purchases, the market price of a share equals or exceeds its net asset
value, the remainder of the distribution will be paid in newly issued shares
valued at net asset value (but not at a discount of more than 5% from market
price). Dividends and distributions are subject to taxation, whether received in
cash or in shares.
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in shares of the Fund purchased
on the open market. These voluntary cash payments will be invested on or shortly
after the 15th day of each calendar month, and voluntary payments should be sent
so as to be received by the Plan Agent no later than five business days before
the next investment date. Barring suspension of trading, voluntary cash payments
will be invested within 45 days of receipt. A participant may withdraw a
voluntary cash payment by written notice received by the Plan Agent at least 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There is no charge to participants for reinvesting distributions pursuant
to the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written
notice to the Plan Agent, EquiServe Trust Company, N.A., P.O. Box 43011,
Providence, RI 02940-3011. Such termination will be effective immediately if
received not less than 10 days prior to the record date for a dividend or
distribution; otherwise it will be effective on the first business day after the
payment date of such dividend or distribution. On termination, participants may
either have certificates for the Fund shares in their Plan accounts delivered to
them or have the Plan Agent sell such shares in the open market and deliver the
proceeds, less a $2.50 fee plus brokerage commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
19
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 12/31/02 OF 9/30/02 SECURITY NAME VALUE ($000) NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
1 1 Freddie Mac $25,752 3.0%
2 3 Microsoft Corp. 23,492 2.7
3 4 Countrywide Financial Corp. 19,198 2.2
4 6 Citigroup, Inc. 19,017 2.2
5 2 The Progressive Corp. 17,599 2.0
6 7 American International Group, Inc. 14,139 1.6
7 5 Dell Computer Corp. 13,932 1.6
8 11 Amgen, Inc. 13,671 1.6
9 8 Wells Fargo & Co. 13,217 1.5
10 10 AFLAC, Inc. 13,039 1.5
11 9 Genentech, Inc. 12,554 1.4
12 54 ChevronTexaco Corp. 11,774 1.4
13 18 Cisco Systems, Inc. 11,016 1.3
14 67 Carnival Corp. 10,294 1.2
15 16 J.C. Penney Co., Inc. 9,836 1.1
16 14 XL Capital Ltd., Class A 9,656 1.1
17 44 Liberty Media Corp., Class A 9,564 1.1
18 48 Agilent Technologies, Inc. 9,242 1.1
19 17 Applied Materials, Inc. 9,001 1.0
20 26 Maxim Integrated Products, Inc. 8,812 1.0
21 42 PACCAR, Inc. 8,437 1.0
22 33 QUALCOMM, Inc. 8,253 1.0
23 31 Wyeth 8,179 0.9
24 61 Teradyne, Inc. 8,088 0.9
25 25 Pharmacia Corp. 8,067 0.9
26 15 Tate & Lyle PLC 7,942 0.9
27 35 Intel Corp. 7,623 0.9
28 19 UST, Inc. 7,522 0.9
29 78 Pfizer, Inc. 7,505 0.9
30 30 3M Co. 7,398 0.9
31 84 Biogen, Inc. 7,383 0.9
32 86 Hewlett-Packard Co. 7,350 0.8
33 56 Kerr-McGee Corp. 7,349 0.8
34 50 Eli Lilly and Co. 7,233 0.8
35 20 Nabors Industries, Inc. 7,089 0.8
36 64 Avon Products, Inc. 7,062 0.8
37 45 Network Appliance, Inc. 6,996 0.8
38 83 Tyco International Ltd. 6,832 0.8
39 22 The Allstate Corp. 6,732 0.8
40 32 Burlington Resources, Inc. 6,626 0.8
41 27 The Boeing Co. 6,598 0.8
42 29 ACE Ltd. 6,543 0.8
43 37 Pixar, Inc. 6,470 0.7
44 70 Micron Technology, Inc. 6,401 0.7
45 38 CSX Corp. 6,082 0.7
46 12 Aetna, Inc. 6,066 0.7
47 52 The Charles Schwab Corp. 6,064 0.7
48 23 Archer Daniels Midland Co. 5,951 0.7
49 73 Swift Transportation Co., Inc. 5,905 0.7
50 88 Smurfit-Stone Container Corp. 5,893 0.7
20
MAJOR STOCK CHANGES IN THE FOURTH QUARTER
The following are the major ($4.0 million or more) stock changes--both purchases
and sales--that were made in the Fund's portfolio during the fourth quarter of
2002.
SECURITY NAME PURCHASES (SALES) SHARES AS OF 12/31/02
-------------------------------------------------------------------------------------------------------------
PURCHASES
Abercrombie & Fitch Co. 159,900 159,900
Amazon.com, Inc. 162,670 162,670
AT&T Wireless Services, Inc. 464,250 464,250
Canadian Natural Resources Ltd. 124,500 124,500
Carnival Corp. 242,600 412,600
ChevronTexaco Corp. 107,100 177,100
eBay, Inc. 54,700 54,700
FirstEnergy Corp. 144,900 144,900
Fox Entertainment Group, Inc. 150,000 150,000
King Pharmaceuticals, Inc. 204,500 204,500
Liz Claiborne Inc 178,800 178,800
Mandalay Resort Group 174,700 174,700
Micron Technology, Inc. 320,000 657,200
Pfizer, Inc. 113,500 245,500
SALES
Aetna, Inc. (124,375) 147,525
Chico's FAS, Inc. (180,000) 0
Golden West Financial Corp. (76,400) 0
Goldman Sachs Group, Inc. (101,700) 45,000
The Home Depot, Inc. (159,850) 100,000
International Game Technology (67,500) 0
J.P. Morgan Chase & Co. (121,000) 205,100
Marathon Oil Corp. (211,100) 0
Millipore Corp. (122,000) 0
Motorola, Inc. (455,100) 0
The Progressive Corp. (67,000) 354,605
Sears, Roebuck & Co. (193,700) 0
Stilwell Financial, Inc. (358,800) 0
21
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2002
COMMON STOCKS (96.2%) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (14.8%)
AUTOMOBILES (0.4%)
Ford Motor Co 358,900 $ 3,337,770
---------------
AUTO COMPONENTS (0.4%)
Visteon Corp. 441,800 3,074,928
---------------
HOTELS, RESTAURANTS & LEISURE (3.2%)
Brinker International, Inc. (a) 120,000 3,870,000
Brunswick Corp. 40,950 813,267
Carnival Corp. 412,600 10,294,370
Mandlay Resort Group (a) 174,700 5,347,567
MCDONALD'S CORP. 225,000 3,618,000
Starwood Hotels & Resorts Worldwide, Inc. 172,625 4,098,118
---------------
28,041,322
---------------
HOUSEHOLD DURABLES (0.4%)
Clayton Homes, Inc. 306,450 3,732,561
---------------
INTERNET & CATALOG RETAIL (0.8%)
Amazon.com, Inc. (a) 162,670 3,072,836
eBay, Inc. (a) 54,700 3,709,754
---------------
6,782,590
---------------
LEISURE EQUIPMENT PRODUCT (0.5%)
Eastman Kodak Co. 80,000 2,803,200
Mattel, Inc. 100,000 1,915,000
---------------
4,718,200
---------------
MEDIA (4.0%)
AOL Time Warner, Inc. (a) 200,000 2,620,000
Clear Channel Communications, Inc. (a) 150,000 5,593,500
The E.W. Scripps Co., Class A 55,000 4,232,250
Fox Entertainment Group, Inc., Class A (a) 150,000 3,889,500
Gannett Co., Inc. 36,300 2,606,340
Liberty Media Corp., Class A (a) 1,069,832 9,564,298
Pixar, Inc. (a) 122,100 6,470,079
---------------
34,975,967
---------------
MULTI-LINE RETAIL (4.4%)
Abercrombie & Fitch Co. (a) 159,900 3,271,554
Federated Department Stores, Inc. (a) 154,200 4,434,792
Dollar General Corp 150,000 1,792,500
J.C. Penney Co., Inc. 427,450 9,835,625
Liz Claiborne, Inc. 178,800 5,301,420
May Department Stores Co. 130,000 2,987,400
Target Corp. 165,000 4,950,000
Wal-Mart Stores, Inc. 107,300 5,419,723
---------------
37,993,014
---------------
22
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL (0.7%)
The Home Depot, Inc. 100,000 $ 2,396,000
Michaels Stores, Inc. 90,000 2,817,000
Toys "R" Us, Inc. (a) 124,600 1,246,000
---------------
6,459,000
---------------
CONSUMER STAPLES (4.9%)
FOOD & DRUG RETAILING (1.9%)
CVS Corp. 165,000 4,120,050
The Kroger Corp. (a) 300,000 4,635,000
Tate & Lyle PLC (b) 391,550 7,942,435
---------------
16,697,485
---------------
FOOD PRODUCTS (0.7%)
Archer Daniels Midland Co. 479,950 5,951,380
---------------
PERSONAL PRODUCTS (1.4%)
Avon Products, Inc. 131,100 7,062,357
The Gillette Co. 90,000 2,732,400
Procter & Gamble Co. 25,000 2,148,500
---------------
11,943,257
---------------
TOBACCO (0.9%)
UST, Inc. 225,000 7,521,750
---------------
ENERGY (5.4%)
ENERGY EQUIPMENT & SERVICES (1.5%)
Nabors Industries, Inc. (a) 201,000 7,089,270
Patterson -UTI Energy, Inc. (a) 90,600 2,733,402
Transocean Sedco Forex, Inc. 154,400 3,582,080
---------------
13,404,752
---------------
OIL & GAS (3.9%)
Burlington Resources, Inc. 155,350 6,625,677
Canadian Natural Resources Ltd. 124,500 3,693,915
ChevronTexaco Corp. 177,100 11,773,608
Kerr-McGee Corp. 165,900 7,349,370
Valero Energy Corp. 110,250 4,072,635
---------------
33,515,205
---------------
FINANCIALS (21.5%)
BANKS (2.1%)
FleetBoston Financial Corp. 200,000 4,860,000
Wells Fargo & Co. 282,000 13,217,340
---------------
18,077,340
---------------
23
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS (10.1%)
AmeriCredit Corp. (a) 456,000 $ 3,529,440
The Charles Schwab Corp. 558,850 6,063,523
Citigroup, Inc. 540,404 19,016,817
Countrywide Financial Corp. 371,700 19,198,305
Freddie Mac 436,100 25,751,705
Goldman Sachs Group, Inc. 45,000 3,064,500
J.P. Morgan Chase & Co. 205,100 4,922,400
Merrill Lynch & Co., Inc. 90,000 3,415,500
Morgan Stanley 60,000 2,395,200
---------------
87,357,390
---------------
INSURANCE (9.1%)
ACE Ltd. 223,000 6,542,820
AFLAC, Inc. 432,900 13,038,948
The Allstate Corp. 182,000 6,732,180
American Financial Group, Inc. 28,600 659,802
American International Group, Inc. 244,409 14,139,061
Aon Corp. 177,125 3,345,891
Loews Corp. 37,000 1,645,020
The Progressive Corp. 354,605 17,599,046
Travelers Property Casualty Corp., Class A (a) 206,500 3,025,225
UnumProvident Corp. 175,000 3,069,500
XL Capital Ltd., Class A 125,000 9,656,250
---------------
79,453,743
---------------
REAL ESTATE (0.2%)
The St. Joe Co. 67,425 2,022,750
---------------
HEALTH CARE (13.7%)
BIOTECHNOLOGY (5.7%)
Amgen, Inc. (a) 282,800 13,670,552
Biogen, Inc. (a) 184,300 7,383,058
Genentech, Inc. (a) 378,600 12,554,376
Genzyme Corp. (a) 138,000 4,080,660
IDEC Pharmaceuticals Corp. (a) 146,000 4,842,820
Invitrogen Corp. (a) 95,000 2,972,550
MedImmune, Inc. (a) 141,840 3,853,793
---------------
49,357,809
---------------
HEALTH CARE EQUIPMENT & SERVICES (1.5%)
Alcon, Inc. (a) 83,300 3,286,185
Applera Corp. -- Applied Biosystems Group 65,000 1,140,100
Biomet, Inc. 150,000 4,299,000
Quest Diagnostic, Inc. (a) 75,000 4,267,500
---------------
12,992,785
---------------
HEALTH CARE PROVIDERS & SERVICES (1.3%)
Aetna, Inc. 147,525 6,066,228
Health Management Associates, Inc., Class A (a) 165,000 2,953,500
Tenet Healthcare Corp. (a) 132,600 2,174,640
---------------
11,194,368
---------------
24
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (5.2%)
Biovail Corp. (a) 114,000 $ 3,010,740
Bristol-Myers Squibb Co. 150,000 3,472,500
Eli Lilly and Co. 113,900 7,232,650
King Pharmaceuticals, Inc. (a) 204,500 3,515,355
Pfizer, Inc. 245,500 7,504,935
Pharmacia Corp. 193,000 8,067,400
Schering-Plough Corp. 80,000 1,776,000
Shire Pharmaceuticals Group PLC (a)(b) 148,100 2,797,609
Wyeth 218,700 8,179,380
---------------
45,556,569
---------------
INDUSTRIALS (8.9%)
AEROSPACE & DEFENSE (1.8%)
The Boeing Co. 200,000 6,598,000
General Dynamics Corp. 36,000 2,857,320
L-3 Communications Holdings, Inc. (a) 50,000 2,245,500
Lockheed Martin Corp. 75,000 4,331,250
---------------
16,032,070
---------------
AIR FREIGHT & COURIERS (1.1%)
Expeditors International of Washington, Inc. 116,000 3,787,400
FEDEX CORP. 100,000 5,422,000
---------------
9,209,400
---------------
AIRLINES (0.6%)
Southwest Airlines Co. 389,400 5,412,660
---------------
BUILDING PRODUCTS (0.0%)
York International Corp. 16,000 409,120
---------------
COMMERCIAL SERVICES & SUPPLIES (0.9%)
Fiserv, Inc. (a) 80,000 2,716,000
Paychex, Inc. 186,012 5,189,735
---------------
7,905,735
---------------
CONSTRUCTION & FARM MACHINERY (0.1%)
Deere & Co. 13,925 638,461
---------------
INDUSTRIAL CONGLOMERATES (2.0%)
3M Co. 60,000 7,398,000
General Electric Co. 125,700 3,060,795
Tyco International Ltd. 400,000 6,832,000
---------------
17,290,795
---------------
MACHINERY (1.0%)
PACCAR, Inc. 182,900 8,437,177
---------------
ROAD & RAIL (1.4%)
CSX Corp. 214,850 6,082,403
Swift Transportation Co., Inc. (a) 294,975 5,904,810
---------------
11,987,213
---------------
25
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY (20.7%)
COMMUNICATION EQUIPMENT (2.7%)
3Com Corp. (a) 926,990 $ 4,291,964
Cisco Systems, Inc. (a) 840,900 11,015,790
QUALCOMM, Inc. (a) 226,800 8,253,252
---------------
23,561,006
---------------
COMPUTER PERIPHERALS (4.7%)
Dell Computer Corp. (a) 521,000 13,931,540
Electronic Data Systems Corp. 110,275 2,032,368
EMC Corp. (a) 847,500 5,203,650
Hewlett-Packard Co. 423,400 7,350,224
Network Appliance, Inc. (a) 699,600 6,996,000
Sun Microsystems, Inc. (a) 1,331,200 4,140,032
Symbol Technologies, Inc. 116,150 954,753
---------------
40,608,567
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.0%)
Agilent Technologies, Inc. (a) 514,600 9,242,216
Arrow Electronics, Inc. (a) 118,550 1,516,254
Sanmina-SCI Corp. (a) 867,500 3,895,075
Waters Corp. (a) 115,000 2,504,700
---------------
17,158,245
---------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (6.3%)
Analog Devices, Inc. (a) 115,000 2,745,050
Applied Materials, Inc. (a) 690,820 9,001,385
Broadcom Corp., Class A (a) 160,000 2,409,600
Intel Corp. 489,600 7,623,072
Maxim Integrated Products, Inc. (a) 266,700 8,811,768
Micron Technology, Inc. (a) 657,200 6,401,128
Novellus Systems, Inc. (a) 92,000 2,583,360
Teradyne, Inc. (a) 621,650 8,087,667
Texas Instruments, Inc. 148,100 2,222,981
Xilinx, Inc. (a) 242,700 4,999,620
---------------
54,885,631
---------------
SOFTWARE (5.0%)
Microsoft Corp. (a) 454,385 23,491,704
Oracle Corp. (a) 521,700 5,634,360
PeopleSoft, Inc. (a) 207,000 3,788,100
Siebel Systems, Inc. (a) 592,100 4,428,908
Symantec Corp. (a) 100,000 4,051,000
VERITAS Software Corp. (a) 134,000 2,093,080
---------------
43,487,152
---------------
26
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------
MATERIALS (3.0%)
CHEMICALS (1.1%)
The Dow Chemical Co. 30,100 $ 893,970
IMC Global, Inc. 515,700 5,502,519
International Flavors Fragrances, Inc. 82,700 2,902,770
---------------
9,299,259
---------------
METALS & MINING (1.2%)
Alcan, Inc. 114,250 3,372,660
Alcoa, Inc. 100,000 2,278,000
CONSOL Energy, Inc. 111,300 1,923,264
Freeport-McMoRan Copper & Gold, Inc., Class B 150,150 2,519,517
Nucor Corp. 12,575 519,347
---------------
10,612,788
---------------
PAPER & FOREST PRODUCTS (0.7%)
Smurfit-Stone Container Corp. (a) 382,900 5,893,214
---------------
TELECOMMUNICATION SERVICES (2.0%)
DIVERSIFIED TELECOMMUNICATION SERVICES (2.0%)
AT&T Wireless Services, Inc. (a) 464,250 2,623,012
ALLTEL Corp. 111,800 5,701,800
Nokia Oyj (b) 168,700 2,614,850
Sprint Corp. (FON Group) 180,000 2,606,400
Verizon Communications 100,000 3,875,000
---------------
17,421,062
---------------
UTILITIES (1.3%)
ELECTRIC UTILITIES (1.1%)
Edison International (a) 64,250 761,362
FirstEnergy Corp. 144,900 4,777,353
PG&E Corp. (a) 275,100 3,823,890
---------------
9,362,605
---------------
GAS UTILITIES (0.0%)
El Paso Corp. 50,000 348,000
---------------
MULTI-UTILITIES (0.2%)
Duke Energy Co. 70,650 1,380,501
---------------
TOTAL COMMON STOCKS (Cost of $991,678,281) 835,502,596
---------------
PREFERRED STOCK (0.3%)
CONSUMER DISCRETIONARY (0.3%)
The News Corp., Ltd. (b) (Cost of $3,895,240) 130,000 2,944,500
---------------
27
INTEREST MATURITY PAR
CONVERTIBLE BONDS (0.5%) RATE DATE VALUE MARKET VALUE
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS (0.3)%
METALS & MINING (0.3%)
Freeport-McMoRan Copper & Gold, Inc. 8.25% 1/31/06 $1,701,000 $ 2,413,294
-----------------
INFORMATION TECHNOLOGY (0.2)%
COMPUTER PERIPHERALS (0.0%)
Microstrategy, Inc. 7.50% 6/24/07 116,600 46,640
-----------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (0.1%)
Amkor Technology, Inc. 5.75% 6/1/06 914,000 523,265
-----------------
TELECOMMUNICATION EQUIPMENT (0.1%)
Corning, Inc. 3.50% 11/1/08 1,404,000 968,760
-----------------
UTILITIES (0.0%)
GAS UTILITIES (0.0%)
El Paso Corp. (c) 2/28/21 684,000 212,040
-----------------
TOTAL CONVERTIBLE BONDS (Cost of $4,657,216) 4,163,999
-----------------
SHORT-TERM INVESTMENT 4.1%
REPURCHASE AGREEMENT (4.1%)
Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02,
due 01/02/03 at 1.18% collateralized by U.S. Treasury Bonds and Notes
with maturities to 2020, market value $35,991,943 (Repurchase proceeds
$35,274,312) (Cost of $35,272,000) 35,272,000 35,272,000
-----------------
TOTAL INVESTMENTS (101.1%) (COST OF $1,035,502,737) (d) 877,883,095
-----------------
OTHER ASSETS AND LIABILITIES, NET (-1.1%) (9,331,526)
-----------------
NET ASSETS (100.0%) $ 868,551,569
-----------------
-----------------
NET ASSET VALUE PER SHARE (121,627,547 SHARES OUTSTANDING) $7.14
-----------------
-----------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing.
(b) Represents an American Depositary Receipt.
(c) Zero coupon bond.
(d) Cost for federal income tax purposes is $1,057,135,424.
Gross unrealized appreciation and depreciation of investments at
December 31, 2002 is as follows:
Gross unrealized appreciation $ 113,048,003
Gross unrealized depreciation (292,300,332)
--------------
Net unrealized depreciation $ (179,252,329)
--------------
--------------
28
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2002
ASSETS:
Investments at market value (identified cost $1,035,502,737) $ 877,883,095
Receivable for investments sold 5,463,621
Dividends and interest receivable 967,141
---------------
TOTAL ASSETS 884,313,857
---------------
LIABILITIES:
Payable due to custodian bank 123,861
Payable for investments purchased 3,821,365
Distributions payable to shareholders 10,762,883
Management, administrative and bookkeeping/pricing fees
payable 696,621
Accrued expenses 357,558
---------------
TOTAL LIABILITIES 15,762,288
---------------
NET ASSETS $ 868,551,569
---------------
---------------
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial
interest without par value authorized; 121,627,547 shares
outstanding) $ 1,071,353,359
Accumulated net realized loss on investments less
distributions (45,182,050)
Net unrealized depreciation on investments and foreign
currency translations (157,619,740)
---------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($7.14 PER SHARE) $ 868,551,569
---------------
---------------
See Notes to Financial Statements.
29
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2002
INVESTMENT INCOME:
Dividends $ 10,377,070
Interest 1,033,527
-------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $45,425) 11,410,597
EXPENSES:
Management fee $ 7,281,930
Administrative fee 1,821,149
Bookkeeping and pricing fees 173,764
Custodian fees 70,336
Transfer agent fees 180,388
Shareholder communication expenses 521,899
Trustees' fees and expense 105,255
NYSE fee 105,999
Miscellaneous expenses 113,147
-------------
TOTAL EXPENSES 10,373,867
-------------
CUSTODY EARNINGS CREDIT (1,306)
-------------
NET EXPENSES 10,372,561
-------------
NET INVESTMENT INCOME 1,038,036
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions:
Proceeds from sales 834,963,684
Cost of investments sold 875,314,453
-------------
Net realized loss on investment transactions (40,350,769)
Net unrealized appreciation (depreciation) on investments and foreign currency:
Beginning of year 98,462,182
End of year (157,619,740)
-------------
Change in unrealized appreciation-net (256,081,922)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(295,394,655)
-------------
-------------
See Notes to Financial Statements.
30
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
---- ----
OPERATIONS:
Net investment income $ 1,038,036 $ 3,150,145
Net realized gain (loss) on investment transactions (40,350,769) 26,065,683
Change in unrealized appreciation on investments
and foreign currency-net (256,081,922) (205,304,643)
-------------- --------------
Net decrease in net assets resulting from operations (295,394,655) (176,088,815)
-------------- --------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (1,038,036) (3,150,145)
Net realized gain on investments (2,485,163) (119,953,062)
Paid-in capital (97,967,285) --
-------------- --------------
Total distributions (101,490,484) (123,103,207)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering 95,753,976 --
Dividend reinvestments 36,519,053 56,182,988
-------------- --------------
Increase in net assets from capital share transactions 132,273,029 56,182,988
-------------- --------------
Total decrease in net assets (264,612,110) (243,009,034)
NET ASSETS:
Beginning of year 1,133,163,679 1,376,172,713
-------------- --------------
End of year $ 868,551,569 $1,133,163,679
-------------- --------------
-------------- --------------
See Notes to Financial Statements.
31
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999
---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $10.65 $13.61 $14.02 $14.22
------ ------ ------- -------
Income from Investment Operations:
Net investment income 0.01 0.03 0.05 0.05
Net realized and unrealized gain (loss)
on investments and foreign currency (2.56) (1.79) 0.96 1.22
Provision for federal income tax -- -- -- --
------ ------ ------- -------
Total from Investment Operations (2.55) (1.76) 1.01 1.27
------ ------ ------- -------
Less Distributions from:
Net investment income (0.01) (0.03) (0.06) (0.05)
Realized capital gain (0.02) (1.17) (1.36) (1.34)
Paid-in capital (0.85) -- -- --
------ ------ ------- -------
Total Distributions (0.88) (1.20) (1.42) (1.39)
------ ------ ------- -------
Change due to rights offering (b) (0.08) -- -- --
Impact of shares issued in dividend
reinvestment (c) -- -- -- (0.08)
------ ------ ------- -------
Total Distributions, Reinvestments
and Rights Offering (0.96) (1.20) (1.42) (1.47)
------ ------ ------- -------
Net asset value at end of year $ 7.14 $10.65 $13.61 $14.02
------ ------ ------- -------
------ ------ ------- -------
Market price at end of year $ 6.64 $11.09 $12.375 $11.063
------ ------ ------- -------
------ ------ ------- -------
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value (25.0)% (12.7)% 8.8% 10.2%
Based on market price (33.0)% 0.0% 25.4% (4.4)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 869 $1,133 $1,376 $1,396
Ratio of expenses to average net assets (e) 1.05% 1.03% 0.96% 0.97%
Ratio of net investment income to
average net assets (e) 0.11% 0.27% 0.37% 0.37%
Portfolio turnover rate 83% 64% 83% 90%
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offerings for shares at a price below net asset
value.
(c) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
32
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Net asset value at beginning of year $13.32 $11.95 $11.03 $ 9.26 $10.40 $10.78
------- ------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.05 0.05 0.08 0.10 0.11 0.12
Net realized and unrealized gain (loss)
on investments and foreign currency 2.35 3.01(a) 2.15(a) 2.71 (0.20) 0.78(a)
Provision for federal income tax -- (0.36) (0.13) -- -- (0.18)
------- ------- ------- ------- ------- -------
Total from Investment Operations 2.40 2.70 2.10 2.81 (0.09) 0.72
------- ------- ------- ------- ------- -------
Less Distributions from:
Net investment income (0.05) (0.05) (0.08) (0.10) (0.12) (0.12)
Realized capital gain (1.35) (1.28) (1.10) (0.94) (0.52) (0.58)
Paid-in capital -- -- -- -- (0.36) (0.37)
------- ------- ------- ------- ------- -------
Total Distributions (1.40) (1.33) (1.18) (1.04) (1.00) (1.07)
------- ------- ------- ------- ------- -------
Change due to rights offering (b) (0.10) -- -- -- (0.05) (0.03)
Impact of shares issued in dividend
reinvestment (c) -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions, Reinvestments
and Rights Offering (1.50) (1.33) (1.18) (1.04) (1.05) (1.10)
Net asset value at end of year $14.22 $13.32 $11.95 $11.03 $ 9.26 $10.40
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Market price at end of year $12.938 $13.313 $11.250 $10.875 $ 8.500 $11.125
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 19.8% 26.6% 21.7% 31.8% (0.8)% 8.8%
Based on market price 9.1% 34.4% 16.2% 41.4% (14.9)% 12.7%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $1,351 $1,150 $ 988 $ 872 $ 710 $ 725
Ratio of expenses to average net assets (e) 1.00% 1.01% 1.03% 1.06% 1.07% 1.08%
Ratio of net investment income to
average net assets (e) 0.39% 0.38% 0.73% 0.92% 1.16% 1.08%
Portfolio turnover rate 76% 99% 70% 54% 44% 72%
(d) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(e) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
See Notes to Financial Statements.
33
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Equity Fund ("All-Star" or the "Fund"), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. All-Star's investment goal is to seek total
investment return, comprised of long term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities. All-Star is managed by Liberty Asset Management Company (the
"Manager").
The following is a summary of significant accounting policies followed by
All-Star in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
VALUATION OF INVESTMENTS -- Portfolio securities listed on an exchange and
over-the-counter securities quoted on the NASDAQ system are valued on the basis
of the last sale on the date as of which the valuation is made, or, lacking any
sales, at the current bid prices. Over-the-counter securities not quoted on the
NASDAQ system are valued on the basis of the mean between the current bid and
asked prices on that date. Debt securities generally are valued by a pricing
service based on market transactions for normal, institutional-size trading
units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used. Securities for which
reliable quotations are not readily available are valued at fair value, as
determined in good faith and pursuant to procedures established by the Board of
Trustees ("Trustees"). Short-term instruments maturing in more than 60 days for
which market quotations are readily available are valued at current market
value. Short-term instruments with remaining maturities of 60 days or less are
valued at amortized cost, unless the Trustees determine that this does not
represent fair value. These securities will be valued at their fair value as
determined in good faith by or under the supervision of the Trustees.
PROVISION FOR FEDERAL INCOME TAX -- Consistent with the Fund's policy to qualify
as a regulated investment company and to distribute all of its taxable income to
shareholders, no federal income tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS -- All-Star currently has a policy of paying
distributions on its common shares totaling approximately 10% of its net asset
value per year, payable in four quarterly distributions of 2.5% of All-Star's
net asset value at the close of the New York Stock Exchange on the Friday prior
to each quarterly declaration date. Distributions to shareholders are recorded
on the ex-dividend date.
OTHER -- Security transactions are accounted for on the trade date. Interest
income and expenses are recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date.
NOTE 2. FEDERAL TAX INFORMATION
Income and capital gain distributions are determined in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles. Reclassifications are made to the Fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryforwards) under income tax regulations.
The tax character of distributions paid during 2002 and 2001 was as
follows:
2002 2001
---- ----
Distributions paid from:
Ordinary income $ 1,038,036 $ 41,109,537
Long-term capital gain 2,485,163 81,993,670
------------ ------------
3,523,199 123,103,207
Return of capital 75,181,165 --
------------ ------------
$ 78,704,364 $123,103,207
As of December 31, 2002, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM UNREALIZED
INCOME CAPITAL GAINS DEPRECIATION*
------ ------------- -------------
- - $179,252,329
*The difference between book-basis and tax-basis unrealized depreciation is
attributable primarily to the tax deferral of losses on wash sales.
The following capital loss carryforwards are available to reduce taxable
income arising from future net realized gains on investments, if any, to the
extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
---------- ------------
2010 $7,255,400
34
Future realized gains offset by the loss carryforwards are not required to be
distributed to shareholders. However, under the Fund's distribution policy, as
discussed in Note 1, such gains may be distributed to shareholders in the year
the gains are realized. Any such gains distributed may be taxable to
shareholders as ordinary income. Under current tax rules, certain capital losses
realized after October 31 may be deferred and treated as occurring on the first
day of the following fiscal year. As of December 31, 2002 for federal income tax
purposes, post-October losses of $16,293,962 attributable to security
transactions were deferred to January 1, 2003.
NOTE 3. FEES PAID TO AFFILIATES
Under All-Star's Management and Portfolio Management Agreements, All-Star
pays the Manager a management fee for its investment management services at
an annual rate of 0.80% of All-Star's average weekly net assets. The Manager
pays each Portfolio Manager a portfolio management fee at an annual rate of
0.40% of the average weekly net assets of the portion of the investment
portfolio managed by it. All-Star also pays the Manager an administrative fee
for its administrative services at an annual rate of 0.20% of All-Star's
average weekly net assets. The annual fund management and administrative fees
are reduced to 0.72% and 0.18%, respectively, on average weekly net assets in
excess of $400 million and the aggregate annual fees payable by the Manager
to the Portfolio Managers are reduced to 0.36% of All-Star's average weekly
net assets in excess of $400 million. The annual fund management and
administrative fees are further reduced to 0.648% and 0.162%, respectively,
on average weekly net assets in excess of $800 million to $1.2 billion and
0.584% and 0.146%, respectively, on average weekly net assets in excess of
$1.2 billion. The aggregate annual fees payable by the Manager to the
Portfolio Managers are also reduced to 0.324% of the Fund's average weekly
net assets in excess of $800 million to $1.2 billion and 0.292% of the Fund's
average net assets in excess of $1.2 billion. The Manager is responsible for
providing pricing and bookkeeping services to the Fund under a Pricing and
Bookkeeping Agreement. Under a separate agreement (the "Outsourcing
Agreement"), the Manager has delegated those functions to State Street Bank
and Trust Company ("State Street"). The Manager pays fees to State Street
under the Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, the Manager
receives from the Fund an annual flat fee of $10,000, paid monthly, and in
any month that the Fund's average weekly net assets are more than $50
million, a monthly fee equal to the average weekly net assets of the Fund for
that month multiplied by a fee rate that is calculated by taking into account
the fees payable to State Street under the Outsourcing Agreement. For the
year ended December 31, 2002, the annualized net asset based fee was 0.017%.
The Fund also pays out-of-pocket costs for pricing services.
OTHER -- The Fund pays no compensation to its officers, all of whom are
employees of the Manager or its affiliates. The Fund has an agreement with
its custodian bank under which $1,306 of custody fees were reduced by balance
credits for the year ended December 31, 2002. The Fund could have invested a
portion of the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into such an
agreement.
NOTE 4. CAPITAL TRANSACTIONS
In a rights offering commencing April 5, 2002, shareholders exercised rights to
purchase 10,688,506 shares at $8.99 per share for proceeds, net of expenses, of
$95,753,976. During the year ended December 31, 2002, and the year ended
December 31, 2001, distributions in the amount of $36,519,053 and $56,182,988
respectively, were paid in newly issued shares valued at market value or net
asset value, but not less than 95% of market value, resulting in the issuance of
4,491,951 and 5,333,568 shares, respectively.
NOTE 5. SECURITIES TRANSACTIONS
Realized gains and losses are recorded on the identified cost basis for both
financial reporting and federal income tax purposes. The cost of investments
purchased and the proceeds from investments sold excluding short-term debt
obligations for the year ended December 31, 2002 were $883,778,638 and
$834,963,684, respectively.
The Fund may enter into repurchase agreements and require the seller of the
instrument to maintain on deposit with the Fund's custodian bank or in the
Federal Reserve Book-Entry System securities in the amount at all times equal to
or in excess of the value of the repurchase agreement, plus accrued interest.
The Fund may experience costs and delays in liquidating the collateral if the
issuer defaults or enters bankruptcy.
35
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE TRUSTEES OF LIBERTY ALL-STAR EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of Liberty All-Star Equity Fund (the "Fund") at
December 31, 2002, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2002 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion. The financial highlights of the Fund for
periods prior to January 1, 1999 were audited by other independent accountants
whose report dated February 12, 1999 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 5, 2003
36
TAX INFORMATION (UNAUDITED)
All 2002 distributions whether received in cash or shares of the Fund consist
of the following:
(1) ordinary income
(2) long-term capital gains distributions and
(3) return of capital
Below is a table that details the breakdown of each 2002 distribution for
federal income tax purposes.
TAX STATUS OF 2002 DISTRIBUTIONS
ORDINARY INCOME
---------------
NET SHORT-TERM LONG-TERM
AMOUNT INVESTMENT CAPITAL CAPITAL RETURN OF
DATE PAID PER SHARE INCOME GAINS GAINS CAPITAL
--------- --------- ------ ----- ----- -------
03/18/02 $0.25 1.28% -- 9.34%* 89.38%
07/01/02 $0.24 1.28% -- -- 98.72%
09/16/02 $0.20 1.28% -- -- 98.72%
01/02/03 $0.19 -- -- -- **
*100% of the Long-Term Capital Gains distribution paid on 3/18/02 is from
qualified 5-year capital gains.
**Pursuant to Section 852 of the Internal Revenue Code, the taxability of this
distribution will be reported on the Form 1099-DIV for 2003.
FOR CORPORATE SHAREHOLDERS
100% of the ordinary income distributed by the Fund for the year ended December
31, 2002, qualifies for the corporate dividends received deduction.
37
TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Liberty All-Star Equity Fund, the
date each was first elected or appointed to office, their term of office, their
principal business occupations and other directorships they have held during at
least the last five years, are shown below.
NUMBER OF
NAME POSITION TERM OF PRINCIPAL PORTFOLIOS IN
(AGE) WITH LIBERTY OFFICE AND OCCUPATION(S) FUND COMPLEX OTHER
AND ALL-STAR LENGTH OF DURING PAST OVERSEEN DIRECTOR-
ADDRESS EQUITY FUND SERVICE FIVE YEARS BY TRUSTEE SHIPS HELD
---------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
John A. Benning Trustee Trustee Retired since December, 1999; 2 TT International
(Age 68) Since 2002 Senior Vice President, General USA (investment
c/o Liberty Asset Counsel and Secretary, Liberty company) and ICI
Management Company Financial Companies Inc. Mutual Insurance
One Financial Center (July, 1985 to December, Co. (D&O/E&O
Boston, MA 02111 1999); Vice President, Insurance)
Secretary and Director,
Liberty Asset Management
Company (August, 1985 to
December, 1999).
Robert J. Birnbaum Trustee Trustee Since Retired since January 1994; 2 Dresdner RCM
(Age 74) 1994; Term Special Counsel, Dechert, Europe Fund
c/o Liberty Asset Expires 2003 Price & Rhoads (September (investment company)
Management Company 1988 to December 1993); and Chicago Options
One Financial Center President and Chief Exchange Board
Boston, MA 02111 Operating Officer, New York
Stock Exchange, Inc.
(May 1985 to June 1988)
James E. Grinnell Trustee Trustee Since Private investor since 2 None
(Age 73) 1986; Term November 1988; President
c/o Liberty Asset Expires 2003 and Chief Executive Officer,
Management Company Distribution Management
One Financial Center Systems, Inc. (1983 to May
Boston, MA 02111 1986); Senior Vice President,
Operations, The Rockport
Company (importer and
distributor of shoes) (May
1986 to November 1988).
Richard W. Lowry Trustee Trustee Since Private Investor since 1987 105 None
(Age 66) 1986; Term (formerly Chairman and
c/o Liberty Asset Expires 2004 Chief Executive Officer, U.S.
Management Company Plywood Corporation) (building
One Financial Center products manufacturer).
Boston, MA 02111
38
NUMBER OF
NAME POSITION TERM OF PRINCIPAL PORTFOLIOS IN
(AGE) WITH LIBERTY OFFICE AND OCCUPATION(S) FUND COMPLEX OTHER
AND ALL-STAR LENGTH OF DURING PAST OVERSEEN DIRECTOR-
ADDRESS EQUITY FUND SERVICE FIVE YEARS BY TRUSTEE SHIPS HELD
---------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES (CONTINUED)
John J. Neuhauser Trustee Trustee Since Academic Vice President 105 Saucony, Inc.
(Age 58) 1998; Term and Dean of Faculties since (athletic footwear)
c/o Liberty Asset Expires 2004 August 1999, Boston College and SkillSoft Corp.
Management Company (formerly Dean, Boston (e-learning)
One Financial Center College School of Management
Boston, MA 02111 from September 1977
to September 1999).
INTERESTED TRUSTEE
William E. Mayer* Trustee Trustee Since Managing Partner, Park Avenue 105 Lee Enterprises
(Age 62) 1998; Term Equity Partners (private equity) (print media);
c/o Liberty Asset Expires 2003 since February 1999 (formerly WR Hambrecht & Co
Management Company Founding Partner, Development (financial service
One Financial Center Capital, LLC from November provider); First
Boston, MA 02111 1996 to February 1999; Dean Health (healthcare).
and Professor, College of
Business and Management,
University of Maryland from
October, 1992 to November 1996).
* A TRUSTEE WHO IS AN "INTERESTED PERSON" (AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940 ("1940 ACT")) OF LIBERTY ALL-STAR EQUITY FUND OR LAMCO. MR. MAYER IS
AN INTERESTED PERSON BY REASON OF HIS AFFILIATION WITH WR HAMBRECHT + CO.
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------
OFFICERS
William R. Parmentier, Jr. (Age 50) President and 1998 President (since June 1998) and Chief Investment
Liberty Asset Management Company Chief Executive Officer (since April 1995), Senior Vice President
One Financial Center Officer (May 1995 to June 1998), Liberty Asset Management.
Boston, MA 02111
Mark T. Haley, CFA (Age 38) Vice President 1999 Vice President-Investments (since January 1999),
Liberty Asset Management Company Director of Investment Analysis (December 1996
One Financial Center to December 1998), Investment Analyst (January
Boston, MA 02111 1994 to November 1996), Liberty Asset Management.
39
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------
OFFICERS (CONTINUED)
J. Kevin Connaughton (Age 38) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty
One Financial Center All-Star Funds since December 2000 (formerly
Boston, MA 02111 Controller of the Liberty Funds and of the
Liberty All-Star Funds from February 1998 to
October 2000); Treasurer of the Stein Roe Funds
since February, 2001 (formerly Controller from
May 2000 to February 2001); Treasurer of the
Galaxy Funds since September 2002 (formerly
Vice President of Colonial Management
Associates, Inc. from February 1998 to October
2000; Senior Tax Manager, Coopers & Lybrand,
LLP from April 1996 to January 1998).
Vicki Benjamin (Age 41) Chief Accounting 2001 Controller of the Liberty Funds and Liberty
One Financial Center Officer and All-Star Funds since June 2002; Chief Accounting
Boston, MA 02111 Controller Officer of the Liberty Funds and Liberty All-Star
Funds since June 2001; Controller and Chief
Accounting Officer of the Galaxy Funds since
September 2002 (formerly Vice President,
Corporate Audit, State Street Bank and Trust
Company from May 1998 to April 2001; Audit
Manager from July 1994 to June 1997, Senior
Audit Manager from July 1997 to May 1998,
Coopers & Lybrand LLP).
Jean S. Loewenberg (Age 57) Secretary 2002 Secretary of the Liberty Funds and of the Liberty
One Financial Center All-Star Funds since February 2002; General
Boston, MA 02111 Counsel of Columbia Management Group since
December 2001; Senior Vice President since
November 1996; Assistant General Counsel of
Fleet National Bank since September 2002
(formerly Senior Vice President and Group
Senior Counsel of Fleet National Bank from
November 1996 to September 2002).
40
[LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
160 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43011, Providence, Rhode Island 02940-3011
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
TRUSTEES
John A. Benning*
Robert J. Birnbaum*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
J. Kevin Connaughton, Treasurer
Vicki L. Benjamin, Chief Accounting Officer and Controller
Jean S. Loewenberg, Secretary
*Member of the audit committee.
[LOGO]
[LOGO]
LIBERTY ASSET MANAGEMENT COMPANY,
FUND MANAGER
ONE FINANCIAL CENTER
BOSTON, MASSACHUSETTS 02111
617-772-3626
www.all-starfunds.com
[LOGO]
A CLEARLY DEFINED PROCESS FOR CORE EQUITY INVESTING
LIBERTY ALL-STAR EQUITY FUND