UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-4809
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Liberty All-Star Equity Fund
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Vincent Pietropaolo, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3698
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Date of fiscal year end: 12/31/04
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Date of reporting period: 12/31/04
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
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A registrant is required to disclose the information specified by Form N-CSR,
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burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
MULTIPLE MANAGERS
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EXCHANGE TRADED
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ALIGNMENT AND OBJECTIVITY
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QUARTERLY DISTRIBUTIONS
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INSTITUTIONAL QUALITY
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MONITORING AND REBALANCING
LIBERTY ALL-STAR EQUITY FUND 2004 ANNUAL REPORT
[ALL STAR(R) EQUITY FUND LOGO]
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A SINGLE INVESTMENT...
A DIVERSIFIED CORE PORTFOLIO
Only one fund offers:
- A diversified, multi-managed portfolio of growth and value stocks
- Exposure to all of the industries 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 $1.3 billion in assets
- Actively managed, exchange traded fund listed on the New York Stock Exchange
(ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
CONTENTS
1 President's Letter
4 Editorial Feature: Fund Fundamentals
10 Consistency of Returns (Chart)
11 Investment Managers/Portfolio Characteristics
12 Manager Roundtable
18 Investment Growth (Chart)
19 Table of Distributions and Rights Offerings
20 Top 20 Holdings and Economic Sectors
21 Major Stock Changes in the Fourth Quarter
22 Schedule of Investments
31 Financial Statements
34 Financial Highlights
36 Notes to Financial Statements
39 Report of Independent Registered Public Accounting Firm
40 Automatic Dividend Reinvestment and Cash Purchase Plan
41 Tax Information
42 Trustees and Officers
INSIDE BACK
COVER Fund Information
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: FEBRUARY 2005
Compared to other years in the recent past, two thousand four was a rather
tranquil period for domestic equity markets. In fact, it would be entirely
correct to call it an "average year," as the S&P 500 Index returned 10.9
percent--precisely its average annualized return dating back 15 years to 1989.
Equity investors remember all too well the roaring market of the late 1990s, the
bear market of 2000-2002 and the strong rebound of 2003. In that light, a less
volatile, relatively uneventful year may have been exactly what investors
needed.
The fact that the stock market drifted for most of the year is not entirely
surprising, as there was a distinct lack of catalysts to move it in one
direction or the other. Indeed, most of the year was a matter of watching and
waiting--chiefly for the presidential election. Once that issue was resolved,
stocks advanced sharply, posting a 9.2 percent advance (in the S&P 500 Index) in
the closing quarter, which represented the lion's share of the full-year return.
As the table below demonstrates, Liberty All-Star Equity Fund fully
participated in the market's positive performance during 2004, topping its
primary benchmark, the Lipper Large-Cap Core Mutual Fund Average, and the S&P
500 Index.
While we are pleased that the Fund outperformed, it is even more gratifying
to note its relative rank among peer funds in the Lipper Large-Cap Core Mutual
Fund universe. The Fund ranked in the fourth percentile for the fourth quarter
and in the fifth percentile for the full year, meaning that it outperformed 96
and 95 percent of funds with similar investment objectives for the quarter and
year, respectively. The table on the next page traces Fund performance over the
long term. The good performance in 2004 supports the Fund's multi-management
objective: a core equity holding offering greater consistency of returns in
support of above-average long-term performance.
FUND STATISTICS AND SHORT-TERM PERFORMANCE
PERIODS ENDING DECEMBER 31, 2004 4TH QUARTER 2004
LIBERTY ALL-STAR EQUITY FUND
Year End Net Asset Value (NAV) $9.30
Year End Market Price $9.56
Year End Premium 2.8%
Distributions $0.22 $0.89
Market Price Trading Range $8.68 to $9.65 $8.05 to $10.49
Premium/(Discount) Range 5.6% to 1.6% 13.6% to (1.3)%
Shares Valued at NAV 12.1% 13.1%
Shares Valued at NAV with Dividends Reinvested 12.1% 13.0%
Shares Valued at Market Price with Dividends Reinvested 11.9% 12.1%
S&P 500 Index 9.2% 10.9%
Lipper Large-Cap Core Mutual Fund Average 8.9% 7.8%
Category Percentile Ranking (1=best; 100=worst) 4th 5th
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 that the Fund's rights offering was fully
subscribed under the terms of the offering. Figures shown for the unmanaged S&P
500 Index are total returns, including income. Past performance cannot predict
future results.
1
ANNUALIZED RATES OF RETURN
LONG-TERM PERFORMANCE SUMMARY -------------------------------------------------------
PERIODS ENDING DECEMBER 31, 2004 3 YEARS 5 YEARS 10 YEARS 15 YEARS 18 YEARS
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at NAV 6.1% 2.2% 11.5% 11.1% 11.3%
Shares Valued at NAV with Dividends Reinvested 6.0% 2.5% 11.7% 11.4% 11.8%
Shares Valued at Market Price with Dividends Reinvested 5.6% 8.1% 13.0% 12.8% 11.7%
S&P 500 Index 3.6% (2.3)% 12.1% 10.9% 12.0%
Lipper Large-Cap Core Mutual Fund Average 1.3% (3.4)% 10.0% 9.6% 10.3%
Category Percentile Ranking (1=best; 100=worst) 3rd 4th 18th 16th 17th
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 that all of the Fund's rights offerings were
fully subscribed under the terms of each offering. Figures shown for the
unmanaged S&P 500 Index are total returns, including income. Past performance
cannot predict future results.
To reiterate my thoughts from last year's Annual Report insofar as these
short- and long-term tables are concerned, I believe they capture the Fund's
underlying strengths. Its structure as a closed-end, multi-managed fund provides
shareholders with access to institutional quality investment managers and
exposure to the two primary equity investment styles, growth and value.
Management and ongoing monitoring by the Fund manager, Liberty Asset Management
Company (LAMCO), ensure alignment with shareholder interests and that the
investment managers are performing up to expectations. A more detailed
description of the Fund's unique attributes may be found in this Annual Report's
feature section, which immediately follows this letter. I encourage you to
review it.
Returning to 2004, it was a year of few surprises, and for every bit of
good news there seemed to be an offsetting negative. As mentioned, the
presidential election in effect neutralized the stock market for three quarters,
leaving the S&P 500 Index just about flat through nine months (+1.5 percent
through September 30). Another newsworthy item was the Federal Reserve reversing
its highly accommodative monetary policy by hiking its target Fed funds rate
five times beginning in June, raising that key short-term rate from 1.0 percent
to 2.25 percent. Those hikes have had relatively little impact on financial
markets, as the Fed had been carefully telegraphing its intentions, so as not to
catch investors off guard. The dollar has fallen--thus far in an orderly manner,
mitigating the potential for a sharp sell-off in dollar denominated assets.
Higher cost oil extracted its measure of pain--a barrel of crude moving
close to $56 in October--but inflation, while at its highest since 2000,
remained quiescent (+3.3 percent as measured by the Consumer Price Index). In
addition, key economic indicators suggest continued growth in consumer and
corporate spending. Iraq remains a painful reminder of the world that we live
in, but terrorist actions--except for events such as the tragic bombings in
Spain and Russia--were muted.
On the corporate front, earnings topped out in the first quarter, but to an
extent that was to be expected after the unsustainably strong recovery in 2003.
By the time fourth quarter figures are tallied, earnings should be up about 20
percent for the year. The energy, utility and telecom sectors were the best
performers among the 10 sectors that make up the S&P 500 Index, while the
sectors that lagged were health care, information technology and consumer
staples.
2
[PHOTO OF FRED H. WOFFORD, WILLIAM R. PARMENTIER JR., MARK T. HALEY]
OFFICERS OF LIBERTY ALL-STAR EQUITY FUND, FROM LEFT: FRED H. WOFFORD, VICE
PRESIDENT - OPERATIONS; WILLIAM R. PARMENTIER, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER; AND MARK T. HALEY, CFA, VICE PRESIDENT - INVESTMENTS.
Of significance to investors in Liberty All-Star Equity Fund, value stocks
once again outperformed growth stocks. In fact, value has now topped growth for
the fifth straight year. The outperformance of value stocks during the past five
years is in reaction to and in sharp contrast to the single-minded focus
investors had for growth stocks in the late 1990s. Liberty All-Star Equity Fund
was structured from its inception as a core equity holding by combining both
value- and growth-oriented managers within one fund. By doing so, it avoids the
need to anticipate these shifts in style leadership, the magnitude and timing of
which are so unpredictable.
The growth/value relationship is just one of many topics discussed in this
year's Manager Roundtable. It is rare that investors have the opportunity to
hear from managers who clearly represent different styles and strategies in one
place. Thus, I urge you to read the Roundtable, beginning on page 12, as I
believe it sheds further light on market trends and the managers' thinking.
In summary, we are very pleased that the Fund outperformed once again. In
reference to 2004, I said in my letter to shareholders a year ago that "A sound
if unspectacular year may be in investors' best long-term interests," and that's
exactly what we got. That said, it is unusual for the stock market to put
together back-to-back average years. I don't know what will happen in 2005, but
it will surely be interesting to follow events.
Whatever happens, you can be assured that your team here at LAMCO remains
vigilant and dedicated to serving shareholders' best long-term interests. We are
pleased with our progress over the years, and look forward confidently to the
future. As always, we are grateful for your ongoing support of the Fund.
Sincerely,
/s/ William R. Parmentier
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
3
FUND FUNDAMENTALS
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Multiple Managers
Large institutional investors--pension funds, endowments and foundations, for
example--employ multiple portfolio managers to make investment decisions. These
large investors establish investment policy and objectives, and then retain
well-qualified investment managers to implement the policy according to their
guidelines.
Liberty All-Star Equity Fund is managed in much the same way. The Fund's
advisor, Liberty Asset Management Company (LAMCO), allocates the Fund's assets
among three value style managers and two growth style managers. Typically, value
style managers focus on companies with attractive prospects that trade at
comparatively low multiples of sales, earnings and book value. Growth managers
concentrate on companies with high expected sales and earnings growth that are
often leaders in expanding sectors of the economy. Why multiple managers with
differing styles? Because allocating assets across several carefully selected
managers with complementary investment styles diversifies the portfolio, can
lower risk over the long term and produce more consistent investment performance
through changing market cycles.
AS ADVISOR TO THE ALL-STAR EQUITY FUND, LIBERTY ASSET MANAGEMENT COMPANY
(LAMCO) ADDS VALUE FOR INVESTORS BY PRACTICING A WELL-DEFINED AND DISCIPLINED
INVESTMENT MANAGEMENT PROCESS. LAMCO BRINGS OBJECTIVITY, EXPERIENCE AND
EXPERTISE TO CONSTRUCTING AND MONITORING A MULTI-MANAGED PORTFOLIO, AND IS
DEDICATED TO THE LONG-TERM SUCCESS OF FUND SHAREHOLDERS.
4
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Exchange Traded
Liberty All-Star Equity Fund is a closed-end investment company with a fixed
number of shares that trade on the New York Stock Exchange and on other
exchanges. By contrast, open-end mutual funds create and redeem shares
continuously as money flows into or out of the fund and are not traded on stock
exchanges.
In recent years, closed-end, exchange-traded funds have become increasingly
popular because they offer several advantages to investors. Taking Liberty
All-Star Equity Fund as an example, Fund shares are bought and sold just like
those of other publicly traded companies. The price of a share is determined by
supply and demand and pricing is continuous--not just end-of-day, as is the case
with open-end funds. Fund shares trade frequently, there are no annual sales
fees and expense ratios are often lower than many open-end funds. While many
exchange-traded funds are passive investments whose return is based on the
performance of an index, Liberty All-Star Equity Fund is actively managed by its
five investment managers. From their perspective, the Fund's closed-end
structure is advantageous because they have the confidence of knowing they will
not experience sharp inflows or outflows of assets and are thus able to focus on
the long-term investment merits of their portfolio.
5
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Alignment and Objectivity
Alignment with shareholders' best interests and objective decision-making are
two fundamental principles to which LAMCO, the Fund's advisor, is dedicated. A
constant focus on these two standards helps to ensure that all the myriad
decisions involved in the management of the Fund are made openly and equitably.
The Fund's goal is better and more consistent long-term total returns for its
shareholders, which LAMCO pursues by combining investment managers with
different styles and strategies.
A series of checks and balances ensures the integrity of that goal. There
are no in-house loyalties or external alliances to stand in the way. The Fund is
governed by an independent Board of Trustees that is elected by and responsible
to the shareholders. The Fund's five investment managers are retained by the
Fund, but make independent buy and sell decisions. They know, however, that
LAMCO monitors their performance and their adherence to their value or growth
style, and will replace them if such action is warranted. In addition, the LAMCO
officers involved in day-to-day management of the Fund are incented to act in
investors' best interests because they too are shareholders and a portion of
their compensation is tied to Fund performance.
6
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Institutional Quality
Liberty All-Star Equity Fund is intended to bring institutional quality
investing to individual investors. Multi-management is one strategy large
institutions use to manage their portfolios that the Fund brings to individual
investors. There are several others, however.
One is manager quality. All-stars are proven performers in their field...a
select group that stands apart. Since its founding in 1986, Liberty All-Star
Equity Fund has sought investment managers who meet its rigorous criteria. LAMCO
selects investment management firms for the Fund after an extensive review of
their background and track record, including the firm's investment philosophy,
process, people and performance. As investors in any type of fund have learned,
manager selection is perhaps THE critical decision. The managers LAMCO retains
for the Fund principally serve institutional clients and are generally not
accessible to individual investors. The Fund's institutional size and
professional reputation can provide shareholders with access to these leading
managers.
LAMCO overlays another level of quality. There are thousands of investment
management firms from which to choose, and their long-term investment
performance varies widely. In researching and retaining managers, LAMCO calls on
the expertise of its professional staff, state-of-the-art analytical tools and
years of experience in the investment field. Similarly, LAMCO's continuous
monitoring ensures that managers meet expectations once they have been retained.
7
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Monitoring and Rebalancing
Two significant phases of ongoing Fund management are monitoring and
rebalancing. These are disciplines that individual investors should
practice--but often don't, owing to a lack of time or expertise. LAMCO adds
value for Fund shareholders by performing both.
Monitoring is a continuous process in which LAMCO routinely reviews the
investment managers. Constant vigilance is required to ensure that each
portfolio manager is performing as expected. Investment returns are closely
watched, but are not the only factor that is monitored. We analyze the Fund's
investment managers' trading activity and the characteristics of their portfolio
holdings to confirm that they are adhering to their strategy and performing well
compared to their peers. We watch for changes in firm ownership and key
personnel because they introduce new decision-makers. Market pressures may lead
a manager to deviate from its investment style and strategy. If warranted by
such events, LAMCO will replace a manager, an action that has occurred 13 times
during the Fund's 18-year history.
Periodic rebalancing maintains the Fund's structural integrity and is a
well-recognized investment discipline. Owing to shifting market sentiment and
their differing styles and strategies, the investment managers will perform
differently over time. This can unbalance the intended composition of the Fund's
investment portfolio. When this happens, LAMCO "locks in" profits by taking
assets from the outperforming managers and giving them to those whose style and
strategy have temporarily lagged. While this seems counterintuitive, it is
really a case of taking money from today's winners and redeploying it among
tomorrow's.
8
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Quarterly Distributions
Since 1988, the Fund has followed a policy of paying annual distributions on its
shares at a rate of 10 percent of the Fund's net asset value (paid quarterly at
2.5 percent per quarter), providing a systematic mechanism for distributing
funds to shareholders. 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.
Recognizing the diverse needs of the Fund's shareholders, the Fund also
offers an Automatic Dividend Reinvestment and Cash Purchase Plan. 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. The
Cash Purchase feature allows shareholders to make additional investments in the
Fund on a monthly basis. The Fund rounds out its services for shareholders by
providing a range of tools, such as a Web site at www.all-starfunds.com;
communications, such as monthly updates and quarterly reports; and investor
assistance via toll-free telephone at 1-800-LIB-FUND.
9
MULTI-MANAGEMENT HAS PRODUCED MORE CONSISTENT RETURNS
The narrative on the preceding six pages is intended to focus on the unique
attributes of the Fund. This chart demonstrates the long-term outcome of these
attributes, particularly the Fund's multi-management structure. Most mutual
funds are run by a single portfolio manager or an internal 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 Fund
Fundamentals 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 18 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.
[GRAPHIC]
Each dot represents the precise 18-year return and consistency record ending
December 31, 2004, of each fund in the universe of 53 open-end Large-Cap Core
equity mutual funds (as classified by Lipper, Inc.) that has an 18-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 APPROXIMATELY EQUALLY DISTRIBUTED AMONG
THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:
[CHART]
SCHNEIDER CAPITAL
MANAGEMENT CORPORATION
VALUE/Companies that are overlooked and undervalued where the firm expects a
rebound in earnings.
PZENA INVESTMENT
MANAGEMENT, LLC
VALUE/Companies with low price-to-normalized earnings ratios that have the
ability to generate earnings recovery.
MATRIX ASSET ADVISORS, INC.
VALUE/Companies that are financially strong and trade below their enterprise
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 Index.
INVESTMENT STYLE SPECTRUM
[CHART]
MASTRA- TOTAL S&P
SCHNEIDER PZENA MATRIX PASQUA TCW FUND 500 INDEX
Number of Holdings 57 36 35 42 26 170* 500
Percent of Holdings in Top 10 40% 43% 39% 29% 57% 16% 21%
Weighted Average Market
Capitalization (billions) $ 19 $ 46 $ 79 $ 33 $ 50 $ 45 $ 92
Average Five-Year
Earnings Per Share Growth 2% 10% 6% 9% 30% 13% 10%
Dividend Yield 1.0% 1.9% 1.5% 0.4% 0.3% 1.0% 1.7%
Price/Earnings Ratio 19x 14x 19x 27x 31x 20X 19x
Price/Book Value Ratio 2.5x 2.7x 3.2x 4.5x 6.4x 3.8X 3.8x
*Certain holdings are held by more than one manager.
11
MANAGER ROUNDTABLE
FROM THEIR GROWTH OR VALUE PERSPECTIVE, THE MANAGERS LOOK BACK AT 2004 AND AHEAD
AT FACTORS THAT MAY IMPACT 2005
THE S&P 500 INDEX RETURNED 10.9 PERCENT LAST YEAR, WHICH WAS IN THE GENERAL
RANGE OF ITS HISTORICAL AVERAGE OF 8 TO 10 PERCENT. BUT THAT DOESN'T MEAN THE
YEAR WAS AVERAGE, AS IT TOOK A STRONG FOURTH QUARTER TO TURN A FLAT YEAR INTO A
GOOD ONE. LOOKING AHEAD, INVESTORS ARE TRYING TO SIFT THROUGH A RANGE OF
CONFLICTING DATA AND OPINIONS TO DISCERN THE STEERING CURRENTS THAT WILL GUIDE
THE STOCK MARKET IN THE MONTHS AHEAD.
Continuing a tradition, the Fund's manager, Liberty Asset Management Company
(LAMCO), recently had the opportunity to moderate another annual roundtable with
the Fund's five investment managers. From their respective points of views, the
managers summarize their style and strategy and then analyze the investment
environment before concluding with comments on a stock they have added recently
to the portion of the All-Star Equity Fund portfolio that they manage. The
participating investment managers and their styles are:
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGERS' VIEWS AT THE TIME
OF THE DISCUSSION (JANUARY 2005) AND ARE SUBJECT TO CHANGE.
MASTRAPASQUA ASSET MANAGEMENT, INC.
PORTFOLIO MANAGER/Frank Mastrapasqua, Ph.D.,
Chairman and Chief Executive Officer
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 growth (PEG) 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.
MATRIX ASSET ADVISORS, INC.
PORTFOLIO MANAGER/David A. Katz, CFA,
President and Chief Executive Officer
INVESTMENT STYLE/Value - Matrix follows an opportunistic value-oriented
investment philosophy. Matrix believes that value can be found in all sectors of
the economy, and thus looks for investment opportunities beyond traditional
value industries. The firm employs a systematic and rigorous investment
process--using both quantitative and qualitative analysis--and adheres to a
strict sell discipline.
PZENA INVESTMENT MANAGEMENT, LLC
PORTFOLIO MANAGER/A. Rama Krishna, CFA,
Managing Principal
INVESTMENT STYLE/Value - Pzena uses fundamental research and a disciplined
process to identify good companies that the firm believes are undervalued on the
basis of current price to an estimated normal level of earnings. Companies in
the portfolio have a sustainable business advantage and a sound business plan to
restore earnings to normal.
SCHNEIDER CAPITAL MANAGEMENT CORPORATION
PORTFOLIO MANAGER/Arnold C. Schneider, III, CFA,
President and Chief Investment Officer
INVESTMENT STYLE/Value - Schneider 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.
"WE ANALYZE INVESTMENTS USING OUR PROPRIETARY SCREENS, IN-HOUSE RESEARCH AND
DIRECT CONTACT WITH COMPANIES, STRIVING TO GROW INVESTMENT PRINCIPAL WITHOUT
EXCESS EXPOSURE TO RISK."
FRANK MASTRAPASQUA,
MASTRAPASQUA ASSET MANAGEMENT
(GROWTH)
12
TCW INVESTMENT MANAGEMENT COMPANY
PORTFOLIO MANAGERS/Craig C. Blum, CFA, Managing Director, and Stephen A.
Burlingame, Managing Director 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. TCW's 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.
"WE CONSTRUCT CONCENTRATED, CONVICTION-WEIGHTED PORTFOLIOS OF COMPANIES THAT
POSSESS SUSTAINABLE COMPETITIVE ADVANTAGES, ALLOWING THEM TO CAPITALIZE ON
LONG-TERM GROWTH OPPORTUNITIES."
CRAIG BLUM,
TCW (GROWTH)"
LAMCO: In last year's roundtable, we asked the managers to briefly summarize
their investment philosophy and strategy. We thought it was an excellent
opportunity to allow Fund shareholders to compare the varying investment
approaches that are combined to form the Liberty All-Star Equity Fund. So, we'd
like to start this year in the same manner and ask the growth managers to get us
underway. Craig Blum, sum up TCW's approach and then let's hear from Frank
Mastrapasqua.
BLUM (TCW--GROWTH): We believe superior returns can be achieved by maintaining a
long-term perspective and emphasizing the highest quality companies that have
open-ended growth opportunities. We construct concentrated, conviction-weighted
portfolios of companies that possess sustainable competitive advantages,
allowing them to capitalize on long-term growth opportunities.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Our investment philosophy
is to build client wealth through disciplined portfolio management. We are a
sector-focused, large-to-mid capitalization growth manager. We analyze
investments using our proprietary screens, in-house research and direct contact
with companies, striving to grow investment principal without excess exposure to
risk. Independent research gives us a competitive advantage. Our analysts
evaluate company growth potential, which includes market share prospects,
financial condition, key components of earnings and cash flow growth, execution
of management's vision, and competitive advantage. We utilize a proprietary
valuation process called the GRAD Point methodology (Growth to Risk-Adjusted
Differential), which risk-adjusts the price-to-earnings ratio and compares it to
the 3- to 5-year earnings per share projected growth rate.
LAMCO: Let's hear from the value side managers on their approach and philosophy.
David Katz, you're the newest manager, so let's turn to you first.
KATZ (MATRIX ASSET ADVISORS - VALUE): We are an opportunistic value investor
trying to invest in good businesses at a significant discount from what we think
an astute business person would pay to own and operate the company. Our
investment philosophy is tied to the traditional tenets of Graham and Dodd, but
we have adopted their philosophy to the economy of the twenty-first century. We
perform detailed, fundamental analysis on companies. We try to figure out what a
sensible valuation is based on the company's earnings, dividends, return on
equity, asset value and so forth. But within the value school, we have a strong
bias towards better businesses and better industries. Some traditional value
managers only focus on "old economy" companies. We, on the other hand, are as
comfortable buying a technology company as we are a ketchup company.
"...WITHIN THE VALUE SCHOOL, WE HAVE A STRONG BIAS TOWARDS BETTER BUSINESSES AND
BETTER INDUSTRIES...WE ARE AS COMFORTABLE BUYING A TECHNOLOGY COMPANY AS WE ARE
A KETCHUP COMPANY."
DAVID KATZ,
MATRIX ASSET ADVISERS (VALUE)
LAMCO: Arnie Schneider and Rama Krishna, round out your value point of view,
please.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): We believe that disciplined
value investing, built on a research-driven foundation, can deliver investment
success over time. Promising opportunities can be
13
found among securities that are most deeply undervalued relative to their future
earnings potential. Our research process is geared toward identifying securities
with low investor expectations that are temporarily trading at a substantial
discount to their underlying business value.
KRISHNA (PZENA INVESTMENT MANAGEMENT - VALUE): We are old-fashioned value
investors. Some people would use the term "deep value." We think of it in a
fairly straightforward way: We're trying to find good companies when their share
prices get very depressed relative to the ability of the underlying business to
generate earnings and cash flow over the long term. We approach these businesses
with a fairly healthy dose of realism; that is, you don't get to buy the best
businesses with the fastest growth rates and the wonderful management teams and
all of the characteristics that everybody wants for the simple reason that they
don't sell for a low price. Many times, however, there are good businesses that
do get marked down, generally because something has gone wrong. Our whole
philosophy is to try and identify those companies and then make the judgment as
to which ones are really good businesses where the problems are only temporary.
LAMCO: With 2004 now complete, it was one of those years in which consensus
estimates among investment managers appear to have played out in reality--that
is, for reasonable gains around 10 percent for indices such as the S&P 500 and
the Russell 1000, with smaller cap stocks providing returns in the 15 to 20
percent range. Looking back at 2004, how do you assess the year from the
perspective of your own style and strategy? Let's go in reverse order and start
with the value managers and Rama Krishna.
"WE'RE TRYING TO FIND GOOD COMPANIES WHEN THEIR SHARE PRICES GET VERY DEPRESSED
RELATIVE TO THE ABILITY OF THE UNDERLYING BUSINESS TO GENERATE EARNINGS AND CASH
FLOW OVER THE LONG TERM."
RAMA KRISHNA,
PZEMA INVESTMENT MANAGEMENT
(VALUE)
KRISHNA (PZENA INVESTMENT MANAGEMENT - VALUE): As we began 2004, valuation
spreads between the cheapest stocks in our universe and the broad market were
narrow. We weren't seeing the same types of deeply discounted opportunities that
had existed when there was significant uncertainty about the future of the
economy, and about geopolitical risks. The types of opportunities that we were
seeing tended to be in what one might consider to be "boring" companies, i.e.,
insurance and other non-bank financials. Our expectation was for single digit
market returns, with a fairly normal margin of value outperformance. So, from
that perspective, we were pretty satisfied with the way 2004 turned out.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): The market environment favored
our value style investment philosophy. Value indexes outperformed growth for
five years in a row, based on the Russell 1000 indices. Our portfolio was also
well positioned throughout the year in cyclical companies that delivered notable
earnings gains in 2004 and offered the potential for continued progress.
KATZ (MATRIX ASSET ADVISORS - VALUE): Two thousand four was a difficult year for
us on a relative and absolute basis. There was a high negative correlation
between market leadership and our portfolio. We were not meaningfully
represented in energy, utilities, basic materials and real estate-related
stocks. While value outpaced growth last year, we perceived the greater large
cap value opportunity to be in out-of-favor or fallen growth stock holdings,
which were exhibiting value-like pricing with growth-like business performance.
Our focus on these large and often mega-cap stellar businesses, however, lagged
the market in 2004, as these stocks continued to trail smaller and more
speculative stocks. Also, many of the industries we did like, such as
semiconductors and pharmaceuticals, encountered a difficult year.
LAMCO: Let's turn to the growth managers and ask them about their style and how
it fared last year. Frank Mastrapasqua, what are your thoughts?
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Large cap growth
underperformed many of the other equity asset classes and fell victim to the
compression of international political stresses--principally, terrorist
risks--that impacted investor psychology from June through September.
14
Moreover, the election further heightened investor anxiety depressing
valuations. The fourth quarter reflected the lessening of such stress and an
increasing focus upon the fundamentals.
BURLINGAME (TCW - GROWTH): While large capitalization growth stocks were out of
favor we were able to outperform the broad market with superior stock selection.
LAMCO: Two thousand five may be shaping up as 2004's opposite, in that there is
less consensus among investors. The bulls and bears can both make compelling
cases. Most of the Fund's managers take a bottom-up approach, while keeping an
eye on macro factors. In light of your approach, what are your thoughts about
'05?
"OUR RESEARCH PROCESS IS GEARED TOWARD IDENTIFYING SECURITIES WITH LOW INVESTOR
EXPECTATIONS THAT ARE TEMPORARILY TRADING AT A SUBSTANTIAL DISCOUNT TO THEIR
UNDERLYING BUSINESS VALUE."
ARNIE SCHNEIDER,
SCHNEIDER CAPITAL MANAGEMENT (VALUE)
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): We expect that 2005
should experience somewhat less external stress with emphasis upon rational
business decision-making. Cash flow, profit growth and a resulting positive
impact on capital spending should be the main contributors to economic growth.
The under-investing relative to cash flow that dominated last year should be
reversed in 2005. The delays in the replacement cycle and the technological
advancements that have emerged in the last four to five years should foster an
acceleration in spending.
BLUM (TCW - GROWTH): While there is consensus among economists that in 2005 the
economy will continue to grow slowly with modest inflation, equity outlooks are
all over the map. We will keep a close eye on energy costs, the dollar, Fed
policy, housing and capital spending like everyone else. But, in the final
analysis we will construct the portfolio on a bottom-up basis emphasizing high
quality growth companies.
LAMCO: Let's ask the value managers to share their thoughts about the year
ahead. Start us off, please, Arnie Schneider.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): U.S. equity valuations are not
cheap relative to our current point in the economic, corporate profit and
interest rate cycles. The economic scene should be relatively tranquil in 2005,
but there is no doubt that global economies are slowing. The rate of U.S.
corporate profit growth peaked in 1Q04, and profit margins stand at historical
highs. In addition, we have begun the next cycle of global monetary tightening.
U.S. equity returns averaging in the mid-single digits would not surprise us.
KATZ (MATRIX ASSET ADVISORS - VALUE): We believe that, like 2004, the impact of
stock picking will be significant in 2005. However, unlike 2004, we expect to
see different leaders, both in terms of sectors and individual issues.
Basically, we think that 2005 will be the year that mega-cap stocks once again
reemerge as market leaders after a long exile. We also look for strength in the
semi-conductor area of tech, and for capital markets-oriented financials to move
ahead despite relative weakness in consumer-oriented financials.
KRISHNA (PZENA INVESTMENT MANAGEMENT - VALUE): Valuation spreads are even
narrower at the beginning of 2005, given that value stocks outperformed the
broad market in 2004. The outlook for stocks in general is still OK. Inflation
is in check and corporate earnings growth, though slower than last year, should
still be respectable. Despite the narrow valuation spreads, there are still
opportunities for the value investor to add value, as we apply our research to
identify valuation anomalies at the company level. Some new opportunities have
recently emerged, particularly in businesses that have been hurt by the recent
spike in raw material prices.
"WHILE LARGE CAPITALIZATION GROWTH STOCKS WERE OUT OF FAVOR [IN 2004] WE WERE
ABLE TO OUTPERFORM THE BROAD MARKET WITH SUPERIOR STOCK SELECTION."
STEPHEN BURLINGAME, TCW (GROWTH)
LAMCO: What are the one or two macro factors (e.g., interest rates, energy
costs, raw materials/commodities, geopolitical tensions, corporate earnings,
etc.) that you believe investors should watch in '05 as positive or negative
15
influences insofar as stock market performance is concerned? Let's stay with the
value managers.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Long-term interest rates bear
close watching in 2005. Surprisingly, long-term Treasury yields hardly budged in
2004. Given the likelihood for higher rates, it will be important for investors
to discern the reasons for the increases in order to judge their influence on
the equity market. For example, rising rates could be the normal outcome of
another year of moderate economic growth. They could, however, be a reaction to
inflation fears, a fall in the dollar, or less willingness on the part of
foreigners to buy Treasuries to finance our current account deficit.
"WE BELIEVE THAT, LIKE 2004, THE IMPACT OF STOCK PICKING WILL BE SIGNIFICANT IN
2005. HOWEVER, UNLIKE 2004, WE EXPECT TO SEE DIFFERENT LEADERS..."
DAVID KATZ,
MATRIX ASSET ADVISERS (VALUE)
KATZ (MATRIX ASSET ADVISORS - VALUE): We believe that among the various macro
factors interest rates are likely to play the largest role in 2005. Rising
interest rates should reflect continued economic strength, which will serve as
an important backdrop to the 2005 stock market. Rising rates should dampen the
enthusiasm for real estate and there could be a pendulum swing back to equities
from real estate as well as from bonds, assuming long-term rates finally begin
to rise materially. Geopolitical uncertainty has become a fact of life, and
always has the potential to wreak short-term havoc on the equity market.
KRISHNA (PZENA INVESTMENT MANAGEMENT - VALUE): Heightened inflationary fears
would not be constructive for equities, given the low inflation assumptions that
are discounted in the market today. Any number of factors could contribute to an
acceleration of inflation: collapse of the dollar or a spike in energy prices
are just two potential sources. We're not making bets on either, just keeping
our eyes open. We might see an acceleration of merger activity, as corporate
balance sheets are in great shape, and companies are searching for topline
growth in a moderate GDP growth environment.
LAMCO: Let's hear from the growth managers, starting with Frank Mastrapasqua.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): The pace of interest rate
changes and the behavior of oil prices are likely to periodically impact the
equity market and contribute to volatility. At the same time, productivity, cash
flow and the competitive advantage the dollar is providing should foster
positive results. In today's environment, growth offers the best value. The
underperformance of growth stocks for the last five years and the earning power
that has been generated makes for an intriguing valuation environment in
2005-2006. For example, the price-to-earnings growth (PEG) ratio for our stocks
is approximately half the S&P 500 (1.5 vs. 3.1).
BURLINGAME (TCW - GROWTH): A weakening dollar could put upward pressure on
interest rates and inflation. This could spell problems for housing, which in
turn would slow consumer spending and negatively impact all financial assets. In
the early stages of a recovery, economically-sensitive commodity businesses that
trade at low valuations get a strong bounce. We have seen that so far. However,
as the recovery matures, only those solid growth companies that are gaining a
larger share of the overall economy are going to be able to demonstrate good
growth. Even if multiples do not expand, growing companies should see price
appreciation. At this stage we feel the normal valuation premium afforded to
quality growth companies has been compressed such that, ironically, growth
represents good value.
"THE OUTLOOK FOR STOCKS IN GENERAL IS STILL OK. INFLATION IS IN CHECK AND
CORPORATE EARNINGS GROWTH, THOUGH SLOWER THAN LAST YEAR, SHOULD STILL BE
RESPECTABLE."
RAMA KRISHNA,
PZENA INVESTMENT MANAGEMENT
(VALUE)
LAMCO: Let's conclude as we did last year, and that is by asking you to identify
a stock that you have added recently to the portion of the All-Star Equity Fund
portfolio that you manage and tell us why you invested in it.
16
Why don't you lead off for the value managers, David Katz?
KATZ (MATRIX ASSET ADVISORS - VALUE):
MedImmune is a biotechnology company with $1 billion in revenues, a very strong
balance sheet with more than $4 cash per share and great prospects. MedImmune
combines a leading business position with a compelling valuation of 18 times
earnings when certain money-losing R&D projects and cash per share are excluded.
Our belief is that MedImmune's strong operating posture is enhanced by a good
pipeline, including expected royalties from upcoming cervical cancer vaccines.
We believe that in a pharmaceutical industry seeking additional product
opportunities, MedImmune is an extremely attractive acquisition candidate. At a
$6.2 billion market capitalization, the company is readily digestible. Our sense
is that management has a greater willingness to entertain a merger at the right
price, something they were not previously in favor of. We think the stock can be
a strong performer on its own and a home run if acquired.
KRISHNA (PZENA INVESTMENT MANAGEMENT - VALUE): We recently added McKesson Corp.,
a pharmaceutical distributor, to the portfolio. We like the industry structure,
as McKesson and its two primary competitors, AmerisourceBergen and Cardinal
Health, each have an approximately 30 percent market share. However, the
industry profitability model is in transition, as McKesson and others
historically made money from obtaining special pricing from manufacturers, as
well as by making large inventory purchases in advance of drug price increases.
Drug companies have cut back on these special deals, as well as on the amount of
inventory they will allow a distributor to hold, cutting into the margins of all
drug distributors. In the future, McKesson and its competitors expect to recover
margin by pricing contracts with reduced discounts to its customers, as well as
through better overall pricing from the manufacturers. Priced at about 10 times
our normal earnings estimate, McKesson stock is an attractive opportunity.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Carnival Corp. is the world's
largest cruise line in a growth industry dominated by two major players. After
enduring three years of large increases in industry capacity and a brutal
pricing environment, the cruise industry's future has begun a promising
turnaround. Slowing capacity growth and resurgent demand have led to a more
favorable pricing environment. Carnival will be able to use its scale and cost
advantages to generate meaningful growth in earnings and cash flow.
LAMCO: Let's turn to the growth managers to hear about their recent purchases.
BLUM (TCW - GROWTH): We added XM Satellite Radio to the portfolio. XM is the
market share leader in the rapidly growing "for fee" radio market. The business
enjoys tremendous leverage as the costs of satellite and programming are largely
fixed and can be spread over an ever-growing subscriber base. Competition is
limited, as the company operates in a regulated duopoly and offers a compelling
product at a modest price.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Monster Worldwide is
engaged in online career management through the industry-leading Web site
Monster.com. The company also has an online advertising agency and yellow pages
advertising agency through its directional marketing business. On a broad level,
the company will benefit from an improving economy and accelerating hiring
activity. Monster has established itself as the leader in online career
management while creating a disciplined cost management strategy. The
combination provides for significant operating leverage as the improving economy
leads to job creation. The 95 percent operating margins for the Monster division
highlight the opportunity to transfer significant revenue growth to the bottom
line.
"GIVEN THE LIKELIHOOD FOR HIGHER RATES, IT WILL BE IMPORTANT FOR INVESTORS TO
DISCERN THE REASONS FOR THE INCREASES IN ORDER TO JUDGE THEIR INFLUENCE ON THE
EQUITY MARKET."
ARNIE SCHNEIDER,
SCHNEIDER CAPITAL MANAGEMENT (VALUE)
LAMCO: Many thanks to all.
17
INVESTMENT GROWTH AS OF DECEMBER 31, 2004
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the growth of a $10,000 investment assuming the
purchase of shares of beneficial interest at the closing market price (NYSE:
USA) of $6.00 on December 31, 1987, and tracking its progress through December
31, 2004. This 17-year period covers the calendar years since the Fund commenced
its 10 percent distribution policy in 1988.
[CHART]
MARKET PRICE GROWTH PLUS INCLUDES DISTRIBUTION REINVESTMENT
DISTRIBUTIONS PAID AND RIGHTS OFFERING PARTICIPATION
31-Dec-87 $10,000 $10,000
31-Jan-88 $11,667 $11,667
29-Feb-88 $11,667 $11,667
31-Mar-88 $11,317 $11,315
30-Apr-88 $10,900 $10,896
31-May-88 $10,900 $10,896
30-Jun-88 $12,067 $12,068
31-Jul-88 $11,858 $11,853
31-Aug-88 $11,442 $11,422
30-Sep-88 $12,400 $12,407
31-Oct-88 $12,192 $12,186
30-Nov-88 $12,608 $12,629
31-Dec-88 $13,150 $13,200
31-Jan-89 $13,358 $13,428
28-Feb-89 $12,733 $12,745
31-Mar-89 $13,308 $13,357
30-Apr-89 $13,933 $14,060
31-May-89 $14,350 $14,529
30-Jun-89 $14,542 $14,732
31-Jul-89 $14,958 $15,215
31-Aug-89 $15,583 $15,940
30-Sep-89 $15,792 $16,171
31-Oct-89 $15,375 $15,673
30-Nov-89 $15,792 $16,171
31-Dec-89 $16,400 $16,893
31-Jan-90 $15,775 $16,125
28-Feb-90 $15,983 $16,381
31-Mar-90 $16,142 $16,568
30-Apr-90 $15,933 $16,305
31-May-90 $16,975 $17,620
30-Jun-90 $17,183 $17,868
31-Jul-90 $17,183 $17,868
31-Aug-90 $15,725 $15,973
30-Sep-90 $15,467 $15,618
31-Oct-90 $15,883 $16,176
30-Nov-90 $16,300 $16,734
31-Dec-90 $17,067 $17,753
31-Jan-91 $17,483 $18,326
28-Feb-91 $19,150 $20,616
31-Mar-91 $19,983 $21,760
30-Apr-91 $20,192 $22,054
31-May-91 $21,233 $23,525
30-Jun-91 $20,608 $22,633
31-Jul-91 $20,608 $22,633
31-Aug-91 $21,042 $23,232
30-Sep-91 $22,083 $24,780
31-Oct-91 $21,875 $24,471
30-Nov-91 $21,892 $24,456
31-Dec-91 $23,767 $27,315
31-Jan-92 $23,767 $27,315
29-Feb-92 $24,633 $28,671
31-Mar-92 $23,800 $27,367
30-Apr-92 $23,800 $27,500
31-May-92 $24,217 $28,154
30-Jun-92 $24,042 $27,871
31-Jul-92 $25,083 $29,550
31-Aug-92 $24,892 $29,258
30-Sep-92 $24,267 $28,226
31-Oct-92 $24,683 $28,914
30-Nov-92 $25,967 $31,047
31-Dec-92 $26,175 $31,400
31-Jan-93 $25,967 $31,047
28-Feb-93 $26,175 $31,400
31-Mar-93 $26,217 $31,490
30-Apr-93 $26,000 $31,114
31-May-93 $26,850 $32,630
30-Jun-93 $26,642 $32,259
31-Jul-93 $26,850 $32,630
31-Aug-93 $27,508 $33,826
30-Sep-93 $27,300 $33,446
31-Oct-93 $27,508 $33,950
30-Nov-93 $27,750 $34,426
31-Dec-93 $28,258 $35,380
31-Jan-94 $28,258 $35,380
28-Feb-94 $28,067 $35,043
31-Mar-94 $26,817 $32,598
30-Apr-94 $27,650 $34,228
31-May-94 $28,067 $35,086
30-Jun-94 $27,233 $33,415
31-Jul-94 $27,442 $33,833
31-Aug-94 $27,442 $33,848
30-Sep-94 $27,233 $33,608
31-Oct-94 $26,608 $32,315
30-Nov-94 $25,967 $31,012
31-Dec-94 $25,550 $30,126
31-Jan-95 $25,967 $31,012
28-Feb-95 $26,992 $33,151
31-Mar-95 $27,825 $34,967
30-Apr-95 $28,033 $35,421
31-May-95 $28,033 $35,367
30-Jun-95 $28,867 $37,228
31-Jul-95 $29,075 $37,693
31-Aug-95 $29,733 $39,152
30-Sep-95 $29,942 $39,629
31-Oct-95 $29,942 $39,629
30-Nov-95 $30,825 $41,629
31-Dec-95 $31,242 $42,609
31-Jan-96 $31,450 $43,098
29-Feb-96 $31,658 $43,588
31-Mar-96 $32,558 $45,698
30-Apr-96 $32,142 $44,694
31-May-96 $32,225 $44,909
30-Jun-96 $32,017 $44,392
31-Jul-96 $30,767 $41,295
31-Aug-96 $32,483 $45,522
30-Sep-96 $32,900 $46,581
31-Oct-96 $33,108 $47,110
30-Nov-96 $33,833 $48,953
31-Dec-96 $34,050 $49,518
31-Jan-97 $34,675 $51,169
28-Feb-97 $35,092 $52,269
31-Mar-97 $35,417 $53,097
30-Apr-97 $35,625 $53,662
31-May-97 $37,200 $57,890
30-Jun-97 $37,929 $59,916
31-Jul-97 $38,971 $62,811
31-Aug-97 $39,138 $63,215
30-Sep-97 $40,492 $67,074
31-Oct-97 $38,617 $61,731
30-Nov-97 $39,704 $64,837
31-Dec-97 $40,304 $66,591
31-Jan-98 $40,408 $66,903
28-Feb-98 $41,658 $70,655
31-Mar-98 $42,450 $73,018
30-Apr-98 $41,825 $71,097
31-May-98 $41,192 $69,689
30-Jun-98 $42,129 $72,675
31-Jul-98 $41,817 $71,680
31-Aug-98 $37,383 $57,373
30-Sep-98 $39,258 $63,520
31-Oct-98 $39,779 $65,227
30-Nov-98 $41,700 $71,562
31-Dec-98 $42,013 $72,614
31-Jan-99 $41,908 $72,263
28-Feb-99 $41,596 $71,211
31-Mar-99 $42,371 $73,790
30-Apr-99 $42,892 $75,589
31-May-99 $43,300 $76,960
30-Jun-99 $44,550 $81,400
31-Jul-99 $44,133 $79,920
31-Aug-99 $42,721 $74,913
30-Sep-99 $41,783 $71,491
31-Oct-99 $42,408 $73,772
30-Nov-99 $41,725 $71,361
31-Dec-99 $41,204 $69,400
31-Jan-00 $40,892 $68,224
29-Feb-00 $40,683 $67,440
31-Mar-00 $41,963 $72,249
30-Apr-00 $41,963 $72,249
31-May-00 $42,667 $74,736
30-Jun-00 $44,438 $81,794
31-Jul-00 $44,854 $83,455
31-Aug-00 $46,200 $88,845
30-Sep-00 $46,408 $89,699
31-Oct-00 $46,096 $88,418
30-Nov-00 $45,133 $84,361
31-Dec-00 $45,758 $86,997
31-Jan-01 $47,633 $94,906
28-Feb-01 $47,267 $93,582
31-Mar-01 $46,100 $88,523
30-Apr-01 $47,583 $94,955
31-May-01 $47,867 $96,312
30-Jun-01 $48,033 $97,053
31-Jul-01 $47,133 $93,052
31-Aug-01 $46,467 $90,827
30-Sep-01 $44,417 $81,399
31-Oct-01 $45,217 $85,078
30-Nov-01 $45,883 $88,276
31-Dec-01 $45,617 $87,021
31-Jan-02 $46,000 $88,825
28-Feb-02 $45,883 $88,266
31-Mar-02 $45,883 $88,266
30-Apr-02 $44,200 $80,161
31-May-02 $44,267 $81,449
30-Jun-02 $42,250 $71,383
31-Jul-02 $40,550 $62,897
31-Aug-02 $41,183 $66,156
30-Sep-02 $39,267 $56,327
31-Oct-02 $40,000 $60,087
30-Nov-02 $41,083 $65,740
31-Dec-02 $39,667 $58,279
31-Jan-03 $40,150 $60,824
28-Feb-03 $39,967 $59,801
31-Mar-03 $40,100 $60,521
30-Apr-03 $41,117 $66,006
31-May-03 $42,333 $72,543
30-Jun-03 $42,950 $75,949
31-Jul-03 $43,733 $80,276
31-Aug-03 $43,617 $79,614
30-Sep-03 $43,583 $79,426
31-Oct-03 $45,283 $89,036
30-Nov-03 $45,633 $91,147
31-Dec-03 $45,667 $91,340
31-Jan-04 $46,267 $94,816
29-Feb-04 $47,033 $99,427
31-Mar-04 $47,100 $99,823
30-Apr-04 $47,183 $100,318
31-May-04 $45,783 $92,036
30-Jun-04 $46,017 $93,457
31-Jul-04 $44,933 $87,382
31-Aug-04 $45,367 $90,038
30-Sep-04 $45,600 $91,502
31-Oct-04 $46,067 $140,497
30-Nov-04 $46,683 $98,330
31-Dec-04 $47,317 $102,401
The dark blue region of the graph above reflects the growth of the investment
assuming all distributions were received in cash and not reinvested back in the
Fund. The value of the investment under this scenario grew to $47,317 (this
value includes distributions per share totaling $18.83 during the period,
including tax credits of $0.67 per share on retained capital gains).
The light blue region of the graph depicts additional value realized through
reinvestment of all distributions and participation in all the rights offerings
under the terms of each offering. On six occasions, the Fund has conducted
rights offerings that allow shareholders to purchase additional shares at a
discount. The value of the investment under this scenario grew to $102,401.
18
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS
RIGHTS OFFERINGS
-----------------------------------------------------
PER SHARE MONTH SHARES NEEDED TO PURCHASE SUBSCRIPTION
YEAR DISTRIBUTIONS COMPLETED ONE ADDITIONAL SHARE PRICE TAX CREDITS*
1988 $ 0.64
1989 0.95
1990 0.90
1991 1.02
1992 1.07 April 10 $ 10.05
1993 1.07 October 15 10.41 $ 0.18
1994 1.00 September 15 9.14
1995 1.04
1996 1.18 0.13
1997 1.33 0.36
1998 1.40 April 20 12.83
1999 1.39
2000 1.42
2001 1.20
2002 0.88 May 10 8.99
2003 0.78
2004 0.89 July 10** 8.34
* The Fund's net investment income and net realized capital gains exceeded
the amount to be distributed under the Fund's 10 percent distribution
policy. In each case, the Fund elected to pay taxes on the undistributed
income and passed through a proportionate tax credit to shareholders.
** The number of shares offered was increased by an additional 25% to cover a
portion of the over-subscription requests.
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its 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 AND MAY BE TAXED AS ORDINARY INCOME UP TO THE AMOUNT OF
THE FUND'S CURRENT AND ACCUMULATED EARNINGS AND PROFITS. If, for any calendar
year, the total distributions made under 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 non-taxable 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 amount 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.
19
TOP 20 HOLDINGS AND ECONOMIC SECTORS
AS OF AS OF
TOP 20 HOLDINGS (PERCENT OF NET ASSETS) DECEMBER 31, 2004 SEPTEMBER 30, 2004
The Boeing Co. 1.9% 2.2%
Morgan Stanley 1.9 1.7
Genentech, Inc. 1.6 1.8
Citigroup, Inc. 1.6 1.4
Network Appliance, Inc. 1.5 1.2
The Progressive Corp. 1.4 1.6
eBay, Inc. 1.4 1.2
Yahoo! Inc. 1.4 1.4
Amgen, Inc. 1.3 1.2
Merrill Lynch & Co., Inc. 1.2 1.1
General Electric Co. 1.1 1.2
Freddie Mac 1.1 1.1
QUALCOMM, Inc. 1.1 1.1
Symantec Corp. 1.1 1.3
Tyco International Ltd. 1.0 1.0
Amazon.com, Inc. 1.0 1.1
Intel Corp. 1.0 1.0
J.P. Morgan Chase & Co. 1.0 1.0
Aon Corp. 1.0 1.0
Pfizer, Inc. 1.0 0.6
----------------- ------------------
25.6% 25.2%
----------------- ------------------
AS OF AS OF
ECONOMIC SECTORS (PERCENT OF NET ASSETS) DECEMBER 31, 2004 SEPTEMBER 30, 2004
Information Technology 22.1% 21.7%
Financials 21.1 21.9
Consumer Discretionary 17.9 16.5
Health Care 13.7 15.3
Industrials 12.4 11.3
Consumer Staples 3.6 3.8
Energy 2.5 3.3
Utilities 2.2 2.4
Materials 2.1 2.6
Telecommunication Services 0.3 0.6
Other Net Assets 2.1 0.6
------------------ ------------------
100.0% 100.0%
------------------ ------------------
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 2004.
SECURITY NAME PURCHASES (SALES) SHARES AS OF 12/31/04
PURCHASES
Commerce Bancorp, Inc. 88,065 88,065
Marriott International, Inc. 90,000 90,000
Monster Worldwide, Inc 215,000 215,000
Pall Corp. 180,000 180,000
Pfizer, Inc. 257,650 507,650
TJX Companies, Inc. 251,600 381,600
SALES
Alcan, Inc. (94,575) 0
Bank of America Corp. (144,948) 228,912
Baxter International, Inc. (130,575) 225,000
BP p.l.c. (70,575) 88,200
Bristol-Myers Squibb Co. (313,850) 314,650
The Charles Schwab Corp. (535,265) 0
Computer Associates International, Inc. (143,000) 372,725
Eli Lilly & Co. (90,740) 0
The Gap, Inc. (228,000) 370,000
Johnson & Johnson (90,000) 0
PG&E Corp. (146,300) 0
21
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2004
COMMON STOCKS (97.8%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (17.9%)
AUTO COMPONENTS (1.0%)
Johnson Controls, Inc. 139,775 $ 8,867,326
Visteon Corp. 461,450 4,508,366
--------------
13,375,692
--------------
AUTOMOBILES (0.8%)
Harley-Davidson, Inc. 87,700 5,327,775
Honda Motor Co., Ltd. (a) 233,000 6,071,980
--------------
11,399,755
--------------
HOTELS, RESTAURANTS & LEISURE (3.5%)
Carnival Corp. 152,525 8,790,016
GTECH Holdings Corp. 13,250 343,837
Marriott International, Inc., Class A 90,000 5,668,200
MGM Mirage (b) 115,000 8,365,100
Starbucks Corp. (b) 196,860 12,276,190
Starwood Hotels & Resorts Worldwide, Inc. 207,300 12,106,320
--------------
47,549,663
--------------
HOUSEHOLD DURABLES (1.1%)
Newell Rubbermaid, Inc. 153,350 3,709,536
Whirlpool Corp. 165,375 11,445,604
--------------
15,155,140
--------------
INTERNET & CATALOG RETAIL (2.4%)
Amazon.com, Inc. (b) 316,500 14,017,785
eBay, Inc. (b) 163,800 19,046,664
--------------
33,064,449
--------------
LEISURE EQUIPMENT & PRODUCTS (0.1%)
Brunswick Corp. 26,375 1,305,563
--------------
MEDIA (4.9%)
Comcast Corp., Class A (b) 194,000 6,370,960
Interpublic Group of Companies, Inc. (b) 410,000 5,494,000
Liberty Media Corp., Class A (b) 1,220,142 13,397,159
Liberty Media International, Inc., Class A (b) 169,637 7,842,318
Pixar, Inc. (b) 112,800 9,656,808
Time Warner, Inc. (b) 300,000 5,832,000
The Walt Disney Co. 234,000 6,505,200
XM Satellite Radio Holdings, Inc., Class A (b) 327,880 12,334,846
--------------
67,433,291
--------------
See Notes to Schedule of Investments.
22
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MULTI-LINE RETAIL (1.1%)
J.C. Penney Co., Inc. 157,750 $ 6,530,850
Kohl's Corp. (b) 63,250 3,110,003
Wal-Mart Stores, Inc. 104,400 5,514,408
--------------
15,155,261
--------------
SPECIALTY RETAIL (3.0%)
Circuit City Stores, Inc. 83,150 1,300,466
The Gap, Inc. 370,000 7,814,400
The Home Depot, Inc. 143,000 6,111,820
Office Depot, Inc. (b) 238,400 4,138,624
RadioShack Corp. 240,525 7,908,462
Ross Stores, Inc. 140,000 4,041,800
TJX Companies, Inc. 381,600 9,589,608
--------------
40,905,180
--------------
CONSUMER STAPLES (3.6%)
FOOD & STAPLES RETAILING (1.0%)
CVS Corp. 169,000 7,616,830
Walgreen Co. 146,000 5,602,020
--------------
13,218,850
--------------
FOOD PRODUCTS (2.3%)
Archer-Daniels-Midland Co. 49,475 1,103,787
General Mills, Inc. 128,700 6,397,677
Sara Lee Corp. 478,900 11,560,646
Smithfield Foods, Inc. (b) 105,225 3,113,608
Tate & Lyle PLC (a) 262,125 9,516,527
--------------
31,692,245
--------------
TOBACCO (0.3%)
Altria Group, Inc. 68,950 4,212,845
--------------
ENERGY (2.5%)
ENERGY EQUIPMENT & SERVICES (1.3%)
Halliburton Co. 150,000 5,886,000
Schlumberger Ltd. 85,000 5,690,750
Tidewater, Inc. 176,000 6,267,360
--------------
17,844,110
--------------
OIL & GAS (1.2%)
BP PLC (a) 88,200 5,150,880
ConocoPhillips 62,000 5,383,460
Premcor, Inc. 130,350 5,496,859
--------------
16,031,199
--------------
See Notes to Schedule of Investments.
23
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
FINANCIALS (21.1%)
CAPITAL MARKETS (3.5%)
The Goldman Sachs Group, Inc. 60,000 $ 6,242,400
Merrill Lynch & Co., Inc. 269,000 16,078,130
Morgan Stanley 473,925 26,312,316
--------------
48,632,846
--------------
COMMERCIAL BANKS (2.0%)
Bank of America Corp. (c) 228,912 10,756,575
Bank of New York Co., Inc. 266,000 8,889,720
Comerica, Inc. 45,525 2,777,936
Commerce Bancorp, Inc. 88,065 5,671,386
--------------
28,095,617
--------------
DIVERSIFIED FINANCIAL SERVICES (3.6%)
CIT Group, Inc. 295,750 13,551,265
Citigroup, Inc. 459,575 22,142,323
J.P. Morgan Chase & Co. 350,850 13,686,659
--------------
49,380,247
--------------
INSURANCE (8.7%)
AFLAC, Inc. 191,300 7,621,392
Allstate Corp. 141,525 7,319,673
American International Group, Inc. 191,450 12,572,521
Aon Corp. 572,525 13,660,446
Genworth Financial, Inc., Class A 173,725 4,690,575
Loews Corp. 192,875 13,559,113
Marsh & McLennan Companies, Inc. 136,700 4,497,430
MBIA, Inc. 138,825 8,784,846
MetLife, Inc. 330,900 13,404,759
The Progressive Corp. 232,105 19,691,788
Torchmark Corp. 97,575 5,575,436
XL Capital Ltd., Class A 95,300 7,400,045
--------------
118,778,024
--------------
REAL ESTATE (1.0%)
CB Richard Ellis Group, Inc., Class A (b) 152,775 5,125,601
The St. Joe Co. 73,550 4,721,910
Trizec Properties, Inc., REIT 197,950 3,745,214
--------------
13,592,725
--------------
THRIFTS & MORTGAGE FINANCE (2.3%)
Fannie Mae 151,350 10,777,633
Freddie Mac 205,425 15,139,823
The PMI Group, Inc. 67,700 2,826,475
Radian Group, Inc. 51,525 2,743,191
--------------
31,487,122
--------------
See Notes to Schedule of Investments.
24
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
HEALTH CARE (13.7%)
BIOTECHNOLOGY (6.1%)
Affymetrix, Inc. (b) 177,000 $ 6,469,350
Amgen, Inc. (b) 268,100 17,198,615
Biogen Idec, Inc. (b) 112,000 7,460,320
Cephalon, Inc. (b) 110,000 5,596,800
Genentech, Inc. (b) 410,400 22,342,176
Genzyme Corp. (b) 138,000 8,013,660
Invitrogen Corp. (b) 87,000 5,840,310
MedImmune, Inc. (b) 381,750 10,349,242
--------------
83,270,473
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.3%)
Alcon, Inc. 74,000 5,964,400
Baxter International, Inc. 225,000 7,771,500
Fisher Scientific International, Inc. (b) 120,000 7,485,600
Guidant Corp. 146,000 10,526,600
--------------
31,748,100
--------------
HEALTH CARE PROVIDERS & SERVICES (2.3%)
AmerisourceBergen Corp. 71,525 4,197,087
CIGNA Corp. 105,175 8,579,125
HCA, Inc. 122,250 4,885,110
McKesson Corp. 272,750 8,580,715
Tenet Healthcare Corp. (b) 280,600 3,080,988
Triad Hospitals, Inc. (b) 44,100 1,640,961
--------------
30,963,986
--------------
PHARMACEUTICALS (3.0%)
Bristol-Myers Squibb Co. 314,650 8,061,333
IVAX Corp. (b) 9,000 142,380
Merck & Co., Inc. 169,000 5,431,660
Pfizer, Inc. 507,650 13,650,708
Shire Pharmaceuticals Group PLC (a) 12,400 396,180
Teva Pharmaceutical Industries Ltd. (a) 165,000 4,926,900
Wyeth 216,000 9,199,440
--------------
41,808,601
--------------
INDUSTRIALS (12.3%)
AEROSPACE & DEFENSE (2.1%)
The Boeing Co. 509,475 26,375,521
Bombardier, Inc., Class B 1,228,850 2,436,914
--------------
28,812,435
--------------
See Notes to Schedule of Investments.
25
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
AIR FREIGHT & LOGISTICS (0.9%)
FedEx Corp. 71,000 $ 6,992,790
Ryder System, Inc. 123,000 5,875,710
--------------
12,868,500
--------------
AIRLINES (0.4%)
Southwest Airlines Co. 310,000 5,046,800
--------------
COMMERCIAL SERVICES & SUPPLIES (1.7%)
Apollo Group, Inc., Class A (b) 119,800 9,669,058
Cendant Corp. 275,825 6,448,788
Monster Worldwide, Inc. (b) 215,000 7,232,600
--------------
23,350,446
--------------
ELECTRICAL EQUIPMENT (1.1%)
American Power Conversion Corp. 415,000 8,881,000
Emerson Electric Co. 92,000 6,449,200
Hubbell, Inc., Class B 3,900 203,970
--------------
15,534,170
--------------
INDUSTRIAL CONGLOMERATES (2.2%)
General Electric Co. 421,200 15,373,800
Tyco International Ltd. 402,550 14,387,137
--------------
29,760,937
--------------
MACHINERY (1.9%)
Danaher Corp. 110,000 6,315,100
Illinois Tool Works, Inc. 63,000 5,838,840
Navistar International Corp. (b) 195,825 8,612,384
Pall Corp. 180,000 5,211,000
--------------
25,977,324
--------------
ROAD & RAIL (2.0%)
CSX Corp. 186,925 7,491,954
Norfolk Southern Corp. 175,000 6,333,250
Swift Transportation Co., Inc. (b) 97,225 2,088,393
Union Pacific Corp. 127,600 8,581,100
Werner Enterprises, Inc. 153,600 3,477,504
--------------
27,972,201
--------------
INFORMATION TECHNOLOGY (22.1%)
COMMUNICATIONS EQUIPMENT (2.5%)
Cisco Systems, Inc. (b) 647,100 12,489,030
Nokia Oyj (a) 410,000 6,424,700
QUALCOMM, Inc. 354,400 15,026,560
--------------
33,940,290
--------------
See Notes to Schedule of Investments.
26
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
COMPUTERS & PERIPHERALS (4.5%)
Adaptec, Inc. (b) 475,000 $ 3,605,250
Dell, Inc. (b) 268,900 11,331,446
EMC Corp. (b) 547,500 8,141,325
Hewlett-Packard Co. 606,775 12,724,072
Network Appliance, Inc. (b) 627,200 20,835,584
Sun Microsystems, Inc. (b) 931,200 5,009,856
--------------
61,647,533
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.0%)
Agilent Technologies, Inc. (b) 378,350 9,118,235
Avnet, Inc. (b) 255,375 4,658,040
Sanmina-SCI Corp. (b) 1,210,175 10,250,182
Symbol Technologies, Inc. 620,000 10,726,000
Vishay Intertechnology, Inc. (b) 470,000 7,059,400
--------------
41,811,857
--------------
INTERNET SOFTWARE & SERVICES (1.4%)
Yahoo!, Inc. (b) 498,100 18,768,408
--------------
IT SERVICES (0.6%)
BearingPoint, Inc. (b) 584,205 4,691,166
Electronic Data Systems Corp. 151,850 3,507,735
--------------
8,198,901
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (5.1%)
Analog Devices, Inc. 155,000 5,722,600
Applied Materials, Inc. (b) 628,990 10,755,729
Intel Corp. 597,000 13,963,830
Maxim Integrated Products, Inc. 259,900 11,017,161
Novellus Systems, Inc. (b) 457,300 12,754,097
Teradyne, Inc. (b) 86,900 1,483,383
Texas Instruments, Inc. 240,000 5,908,800
Xilinx, Inc. 297,900 8,832,735
--------------
70,438,335
--------------
SOFTWARE (5.0%)
Adobe Systems, Inc. 135,000 8,469,900
Computer Associates International, Inc. 372,725 11,576,839
Electronic Arts, Inc. (b) 171,100 10,553,448
Microsoft Corp. 296,800 7,927,528
Oracle Corp. (b) 550,000 7,546,000
Symantec Corp. (b) 559,600 14,415,296
VERITAS Software Corp. (b) 264,000 7,537,200
--------------
68,026,211
--------------
See Notes to Schedule of Investments.
27
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MATERIALS (2.1%)
CHEMICALS (1.0%)
Bayer AG (a) 100,685 $ 3,421,277
Dow Chemical Co. 38,075 1,885,093
The Mosaic Co. (b) 519,925 8,485,176
--------------
13,791,546
--------------
METALS & MINING (0.4%)
Freeport-McMoRan Copper & Gold, Inc., Class B 142,611 5,452,018
--------------
PAPER & FOREST PRODUCTS (0.7%)
Abitibi Consolidated, Inc. 440,650 3,049,298
Domtar, Inc. 300,525 3,627,337
International Paper Co. 73,090 3,069,780
--------------
9,746,415
--------------
TELECOMMUNICATION SERVICES (0.3%)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%)
AT&T Corp. 5,000 95,300
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Telephone and Data Systems, Inc. 63,350 4,874,783
--------------
UTILITIES (2.2%)
ELECTRIC UTILITIES (0.7%)
FirstEnergy Corp. 40,525 1,601,143
Wisconsin Energy Corp. 234,475 7,904,152
--------------
9,505,295
--------------
MULTI-UTILITIES & UNREGULATED POWER (1.5%)
NRG Energy, Inc. (b) 158,250 5,704,912
Reliant Energy, Inc. (b) 868,875 11,860,144
SCANA Corp. 67,725 2,668,365
--------------
20,233,421
--------------
TOTAL COMMON STOCKS (COST OF $1,157,318,590) 1,341,954,110
--------------
See Notes to Schedule of Investments.
28
INTEREST MATURITY PAR
CONVERTIBLE BONDS (0.1%) RATE DATE VALUE MARKET VALUE
INDUSTRIALS (0.1%)
AIRLINES (0.1%)
Delta Air Lines, Inc. 8.00% 06/03/23 $ 1,988,000 $ 1,316,255
----------------
TOTAL CONVERTIBLE BONDS (COST OF $1,423,357) 1,316,255
----------------
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT (2.8%)
Repurchase agreement with State Street Bank & Trust Co.,
dated 12/31/04, due 01/03/05 at 1.50%, collateralized by U.S.
Treasury Bonds with various maturities to 08/15/29, market
value of $39,173,506 (repurchase proceeds $38,394,799)
(Cost of $38,390,000) 38,390,000 38,390,000
----------------
TOTAL INVESTMENTS (100.7%) (COST OF $1,197,131,947) (d) 1,381,660,365
OTHER ASSETS & LIABILITIES, NET (-0.7%) (9,469,690)
----------------
NET ASSETS (100.0%) $ 1,372,190,675
================
NET ASSET VALUE PER SHARE (147,565,342 SHARES OUTSTANDING) $ 9.30
================
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Represents an American Depositary Receipt.
(b) Non-income producing security.
(c) Investments in affiliates during the year ended December 31, 2004:
Security Name: FleetBoston Financial Corp., the parent
company of the investment advisor prior to April 1, 2004:
Shares as of 12/31/03 200,000
Shares purchased --
Shares sold 56,825
Shares converted 143,175
Shares as of 12/31/04 --
Net realized gain $ 845,397
Dividend income earned $ 50,111
Value at end of period --
See Notes to Financial Statements.
29
(C) Investments in affiliates during the year ended December 31, 2004
(continued):
Security Name: Bank of America Corp. (As a result of the acquisition of
FleetBoston Financial Corp. effective April 1, 2004, Bank of America Corp.
became the parent company of the investment advisor.)
Shares as of 12/31/03 --
Shares purchased 161,800*
Shares sold 215,698
Shares acquired through acquisition 79,505
Shares acquired through two for one stock split 203,305
Shares as of 12/31/04 228,912
Net realized gain (loss) $ 1,917,641
Dividend income earned $ 540,286**
Value at end of period $ 10,756,575
*Occurred prior to April 1, 2004.
**Represents activity for the period April 1, 2004 through December 31, 2004.
(d) Cost of investments for federal income tax purposes is $1,206,959,108.
Gross unrealized appreciation and depreciation of investments at
December 31, 2004 is as follows:
Gross unrealized appreciation $ 256,947,213
Gross unrealized depreciation (82,245,956)
--------------
Net unrealized appreciation $ 174,701,257
--------------
See Notes to Financial Statements.
30
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004
ASSETS:
Unaffiliated investments at market value (identified cost $1,188,121,045) $ 1,370,903,790
Affiliated investments at market value (identified cost $9,010,902) 10,756,575
Cash 2,468
Receivable for investments sold 13,369,982
Dividends and interest receivable 1,365,298
------------------
TOTAL ASSETS 1,396,398,113
------------------
LIABILITIES:
Payable for investments purchased 5,845,850
Distributions payable to shareholders 16,998,709
Investment advisory, administrative and bookkeeping/pricing fees payable 983,876
Accrued expenses 362,391
Other liabilities 16,612
------------------
TOTAL LIABILITIES 24,207,438
------------------
NET ASSETS $ 1,372,190,675
==================
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized; 147,565,342 shares outstanding) $ 1,197,446,118
Undistributed net investment income 43,519
Accumulated net realized loss on investments (9,827,161)
Net unrealized appreciation on investments and foreign currency translations 184,528,199
------------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($9.30 PER SHARE) $ 1,372,190,675
==================
See Notes to Financial Statements.
31
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2004
INVESTMENT INCOME:
Dividends $ 13,532,541
Dividends from affiliates 590,397
Interest 513,390
------------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $88,267) 14,636,328
EXPENSES:
Investment advisory fee $ 8,664,829
Administrative fee 2,169,348
Bookkeeping and pricing fees 209,264
Custodian fee 75,452
Transfer agent fees 169,309
Shareholder communication expenses 492,096
Trustees' fees and expense 97,078
NYSE fee 102,030
Miscellaneous expenses 222,094
------------------
TOTAL EXPENSES 12,201,500
------------------
CUSTODY EARNINGS CREDIT (923)
------------------
NET EXPENSES 12,200,577
------------------
NET INVESTMENT INCOME 2,435,751
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investment transactions:
Proceeds from sales 682,321,583
Cost of investments sold 588,724,365
------------------
Net realized gain on investment transactions 93,597,218
Net unrealized appreciation on investments and foreign currency:
Beginning of year 121,537,662
End of year 184,528,199
------------------
Change in unrealized appreciation-net 62,990,537
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 159,023,506
==================
See Notes to Financial Statements.
32
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003
OPERATIONS:
Net investment income $ 2,435,751 $ 1,019,935
Net realized gain on investment transactions 93,597,218 61,134,908
Change in unrealized appreciation (depreciation)
on investments and foreign currency-net 62,990,537 279,157,402
------------------ ------------------
Net increase in net assets resulting from operations 159,023,506 341,312,245
------------------ ------------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (1,019,983)
Net realized gain on investments (91,954,330) (37,070,493)
Paid-in capital (28,587,417) (57,734,539)
------------------ ------------------
Total distributions (120,541,747) (95,825,015)
------------------ ------------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering 131,705,875 --
Dividend reinvestments 49,083,142 38,881,100
------------------ ------------------
Increase in net assets from capital share transactions 180,789,017 38,881,100
------------------ ------------------
Total increase in net assets 219,270,776 284,368,330
NET ASSETS:
Beginning of year 1,152,919,899 868,551,569
------------------ ------------------
End of year (including undistributed net investment
income of $43,519 and $0, respectively) $ 1,372,190,675 $ 1,152,919,899
================== ==================
See Notes to Financial Statements.
33
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 9.13 $ 7.14 $ 10.65 $ 13.61
---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income 0.02 0.01 0.01 0.03
Net realized and unrealized gain (loss)
on investments and foreign currency 1.09 2.76 (2.56) (1.79)
Provision for Federal Income Tax -- -- -- --
---------- ---------- ---------- ----------
Total from Investment Operations 1.11 2.77 (2.55) (1.76)
---------- ---------- ---------- ----------
Less Distributions from:
Net investment income -- (0.01) (0.01) (0.03)
Realized capital gain (0.68) (0.30) (0.02) (1.17)
Paid-in capital (0.21) (0.47) (0.85) --
---------- ---------- ---------- ----------
Total Distributions (0.89) (0.78) (0.88) (1.20)
---------- ---------- ---------- ----------
Change due to rights offering (b) (0.05) -- (0.08) --
Impact of shares issued in dividend
reinvestment (c) -- -- -- --
---------- ---------- ---------- ----------
Total Distributions, Reinvestments
and Rights Offering (0.94) (0.78) (0.96) (1.20)
---------- ---------- ---------- ----------
Net asset value at end of year $ 9.30 $ 9.13 $ 7.14 $ 10.65
========== ========== ========== ==========
Market price at end of year $ 9.56 $ 9.46 $ 6.64 $ 11.09
========== ========== ========== ==========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 13.0% 40.7% (25.0)% (12.7)%
Based on market price 12.1% 56.7% (33.0)% 0.0%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 1,372 $ 1,153 $ 869 $ 1,133
Ratio of expenses to average net assets (e) 1.01% 1.04% 1.05% 1.03%
Ratio of net investment income to
average net assets (e) 0.20% 0.11% 0.11% 0.27%
Portfolio turnover rate 57% 64% 83% 64%
(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.
See Notes to Financial Statements.
34
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26
---------- ---------- ---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income 0.05 0.05 0.05 0.05 0.08 0.10
Net realized and unrealized gain (loss)
on investments and foreign currency 0.96 1.22 2.35 3.01(a) 2.15(a) 2.71
Provision for Federal Income Tax -- -- -- (0.36) (0.13) --
---------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations 1.01 1.27 2.40 2.70 2.10 2.81
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions from:
Net investment income (0.06) (0.05) (0.05) (0.05) (0.08) (0.10)
Realized capital gain (1.36) (1.34) (1.35) (1.28) (1.10) (0.94)
Paid-in capital -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (1.42) (1.39) (1.40) (1.33) (1.18) (1.04)
---------- ---------- ---------- ---------- ---------- ----------
Change due to rights offering (b) -- -- (0.10) -- -- --
Impact of shares issued in dividend
reinvestment (c) -- (0.08) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions, Reinvestments
and Rights Offering (1.42) (1.47) (1.50) (1.33) (1.18) (1.04)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of year $ 13.61 $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03
========== ========== ========== ========== ========== ==========
Market price at end of year $ 12.375 $ 11.063 $ 12.938 $ 13.313 $ 11.250 $ 10.875
========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 8.8% 10.2% 19.8% 26.6% 21.7% 31.8%
Based on market price 25.4% (4.4)% 9.1% 34.4% 16.2% 41.4%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 1,376 $ 1,396 $ 1,351 $ 1,150 $ 988 $ 872
Ratio of expenses to average net assets (e) 0.96% 0.97% 1.00% 1.01% 1.03% 1.06%
Ratio of net investment income to
average net assets (e) 0.37% 0.37% 0.39% 0.38% 0.73% 0.92%
Portfolio turnover rate 83% 90% 76% 99% 70% 54%
(d) Calculated assuming all distributions reinvested at actual reinvestment
price and all rights offerings were fully subscribed under the terms of
each offering.
(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.
35
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004
NOTE 1. ORGANIZATION
Liberty All-Star Equity Fund (the "Fund"), is a Massachusetts business trust
registered under the Investment Company Act of 1940 (the "Act"), as amended, as
a diversified, closed-end management investment company.
INVESTMENT GOAL
The Fund seeks total investment return comprised of long-term capital
appreciation and current income through investing primarily in a diversified
portfolio of equity securities.
FUND SHARES
The Fund may issue an unlimited number of shares of shares of beneficial
interest.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
SECURITY VALUATION
Equity securities are valued at the last sale price at the close of the
principal exchange on which they trade. Unlisted securities or listed securities
for which there were no sales during the day are valued at the closing bid price
on such exchanges or over-the-counter markets.
Debt securities generally are valued by pricing services approved by the
Fund's Board of Trustees (the "Board"), based upon market transactions for
normal, institutional-size trading units of similar securities. The services may
use various pricing techniques which take into account appropriate factors such
as yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other data, as well as broker quotes. Debt securities for which quotations
are readily available are valued at an over-the-counter or exchange bid
quotation.
Short-term debt obligations maturing in more than 60 days for which market
quotations are readily available are valued at current market value. Short-term
debt obligations maturing within 60 days are valued at amortized cost, which
approximates market value.
Investments for which market quotations are not readily available are
valued at fair value as determined in good faith under consistently applied
procedures approved by and under the general supervision of the Board.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is determined
and gains (losses) are based upon the specific identification method for both
financial statement and federal income tax purposes.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment advisor has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis. Premium and discount are
amortized and accreted, respectively, on all debt securities. Corporate actions
and dividend income are recorded on the ex-date.
The Fund estimates components of distributions from real estate investment
trusts (REIT's). Distributions received in excess of income are recorded as a
reduction of the cost of the related investments. If the Fund no longer owns the
applicable securities, any distributions received in excess of income are
recorded as realized gains.
Effective July 1, 2004, the Fund adopted the policy to reduce cost of
investments for financial statement purposes by the distributions received in
excess of income from REIT's. The effect of the change for the year ended
December 31, 2004 is as follows:
DECREASE DECREASE IN INCREASE IN NET
IN COST DIVIDEND INCOME REALIZED GAINS
-------- --------------- ---------------
$ 8,281 $ 69,760 $ 61,479
FEDERAL INCOME TAX STATUS
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
The Fund currently has a policy of paying distributions on its shares of
beneficial interest totaling approximately 10%
36
of its net asset value per year. The distributions are payable in four quarterly
distributions of 2.5% 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.
Distributions to shareholders are recorded on ex-date.
NOTE 3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2004, permanent book and tax basis
differences resulting primarily from differing treatments for REIT adjustments
and foreign currency transactions were identified and reclassified among the
components of the Fund's net assets as follows:
UNDISTRIBUTED NET ACCUMULATED
INVESTMENT INCOME NET REALIZED LOSS PAID-IN CAPITAL
----------------- ----------------- ---------------
$ (2,392,232) $ 2,392,232 $ --
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
The tax character of distributions paid during the years ended December 31,
2004 and December 31, 2003 was as follows:
12/31/04 12/31/03
-------- --------
Distributions paid from:
Ordinary income* $ 50,868,815 $ 9,756,164
Long-term capital gain 41,085,515 28,334,312
---------------- ---------------
91,954,330 38,090,476
Return of capital 23,903,756 53,106,588
---------------- ---------------
$ 115,858,086 $ 91,197,064
*For tax purposes short-term capital gains distributions, if any, are considered
ordinary income distributions.
As of December 31, 2004, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM NET UNREALIZED
INCOME* CAPITAL GAINS APPRECIATION*
------------- ------------- --------------
$ -- $ -- $ 174,701,257
*The differences between book-basis and tax-basis net unrealized appreciation
are primarily due to deferral of losses from wash sales.
Capital loss carryforwards may be available to reduce taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code. As of December 31, 2004, the Fund had no
capital loss carryforwards.
Future realized gains offset by the loss carry-forwards are not required to
be distributed to shareholders. However, under the Fund's distribution policy,
as described above, such gains may be distributed to shareholders in the year
gains are realized. Any gains distributed may be taxable to shareholders as
ordinary income.
NOTE 4. FEES AND COMPENSATION PAID TO AFFILIATES
Liberty Asset Management Company ("LAMCO"), an indirect, wholly owned subsidiary
of Bank of America Corporation ("BOA"), is the investment advisor of the Fund.
Prior to April 1, 2004, LAMCO was an indirect, wholly owned subsidiary of
FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004,
FleetBoston, including the Fund's investment advisor, was acquired by BOA. The
acquisition did not change the way the Fund is managed, the investment personnel
assigned to manage the Fund or the fees paid by the Fund.
INVESTMENT ADVISORY FEE
LAMCO receives a monthly investment advisory fee based on the Fund's average
weekly net assets at the following annual rates:
AVERAGE WEEKLY NET ASSETS ANNUAL FEE RATE
------------------------- ---------------
First $400 million 0.800%
Next $400 million 0.720%
Next $400 million 0.648%
Over $1.2 billion 0.584%
For the year ended December 31, 2004, the Fund's effective investment
advisory fee rate was 0.72%.
Under Portfolio Manager Agreements, LAMCO pays each Portfolio Manager a
portfolio management fee based on the assets of the investment portfolio that
they manage. The portfolio management fee is paid from the investment advisory
fees collected by LAMCO and is based on the Fund's average weekly net assets at
the following annual rates:
AVERAGE WEEKLY NET ASSETS ANNUAL FEE RATE
------------------------- ---------------
First $400 million 0.400%
Next $400 million 0.360%
Next $400 million 0.324%
Over $1.2 billion 0.292%
37
ADMINISTRATION FEE
LAMCO provides administrative and other services for a monthly administration
fee based on the Fund's average weekly net assets at the following annual rates:
AVERAGE WEEKLY NET ASSETS ANNUAL FEE RATE
------------------------- ---------------
First $400 million 0.200%
Next $400 million 0.180%
Next $400 million 0.162%
Over $1.2 billion 0.146%
For the year ended December 31, 2004, the Fund's effective administration
fee rate was 0.18%.
PRICING AND BOOKKEEPING FEES
Columbia Management Advisors, Inc. ("Columbia"), an indirect, wholly owned
subsidiary of BOA and an affiliate of LAMCO, is responsible for providing
pricing and bookkeeping services to the Fund under a pricing and bookkeeping
agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia
has delegated those functions to State Street Corporation ("State Street"). As a
result, Columbia pays the total fees collected from the Fund for these services
to State Street under the Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, Columbia
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 exceed $50 million, an
additional monthly fee. The additional fee rate is calculated by taking into
account the fees payable to State Street under the Outsourcing Agreement. This
rate is applied to the average daily net assets of the Fund for that month. The
Fund also pays additional fees for pricing services based on the number of
securities held by the Fund. For the year ended December 31, 2004, the effective
pricing and bookkeeping fee rate was 0.017%.
CUSTODY CREDITS
The Fund has an agreement with its custodian bank under which custody fees may
be reduced by balance credits. These credits are recorded as a reduction of
total expenses on the Statement of Operations. The Fund could have invested a
portion of the assets utilized in connection with the expense offset arrangement
in an income-producing asset if it had not entered into such an agreement.
FEES PAID TO OFFICERS
With the exception of one officer, all officers of the Fund are employees of
LAMCO or its affiliates and receive no compensation from the Fund. Effective
August 23, 2004, the Board of Trustees appointed a Chief Compliance Officer to
the Fund in accordance with federal securities regulations. The Fund, along with
other affiliated funds, will pay its pro-rata share of the expenses associated
with the Office of the Chief Compliance Officer. The Fund's fee will not exceed
$15,000 per year.
OTHER
Columbia provides certain services to the Fund related to Sarbanes-Oxley
compliance. For the year ended December 31, 2004, the Fund paid $2,937 to
Columbia for such services. This amount is included in "Miscellaneous expenses"
on the Statement of Operations.
NOTE 5. PORTFOLIO INFORMATION
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2004, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $737,336,418 and
$675,567,026, respectively.
NOTE 6. OTHER RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004, the Fund used Bank of America
Securities, a wholly owned subsidiary of BOA, as a broker. Total commissions
paid to Bank of America Securities during the period were $11,469.
NOTE 7. CAPITAL TRANSACTIONS
During the year ended December 31, 2004 and the year ended December 31, 2003,
distributions in the amount of $49,083,142 and $38,881,100, respectively, were
paid in newly issued shares valued at market value or net asset value, but not
less than 95% of market value. Such distributions resulted in the issuance of
5,510,950 and 4,584,918 shares, respectively.
NOTE 8. RIGHTS OFFERING
In a rights offering commencing June 3, 2004, shareholders were issued
non-transferable rights entitling them to subscribe for one additional share for
every ten shares held, with the right to subscribe for additional shares not
subscribed for by others in the primary subscription. The rights offering
expired on July 7, 2004. Shareholders exercised rights to purchase 15,841,927
shares at $8.34 per share, which represented 95% of the net asset value on July
8, 2004. Total proceeds of the offering, net of expenses, amounted to
$131,705,875. The issuance of shares at a discount to NAV resulted in dilution
to the NAV of $0.05 per share.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND THE BOARD OF 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 of
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, 2004, and the results of its operations, the changes in
its net assets and its 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 on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), 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, 2004 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 another independent registered public accounting firm
whose report dated February 12, 1999 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 2005
39
AUTOMATIC DIVIDEND REINVESTMENT AND 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 43010,
Providence, RI 02940-3010. 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.
40
TAX INFORMATION (UNAUDITED)
All 2004 distributions whether received in cash or shares of the Fund consist of
the following:
(1) ordinary dividends
(2) long-term capital gains and
(3) return of capital
The table below details the breakdown of each 2004 distribution for federal
income tax purposes.
TAX STATUS OF 2004 DISTRIBUTIONS
ORDINARY DIVIDENDS LONG-TERM
AMOUNT ------------------------------ CAPITAL RETURN OF
DATE PAID PER SHARE QUALIFIED NON-QUALIFIED GAINS CAPITAL
*01/02/04 $ 0.22 11.89% 32.11% 35.00% 21.00%
03/22/04 $ 0.24 11.89% 32.11% 35.00% 21.00%
06/28/04 $ 0.22 11.89% 32.11% 35.00% 21.00%
10/04/04 $ 0.21 11.89% 32.11% 35.00% 21.00%
**01/03/05 $ 0.22 -- -- -- --
*Pursuant to Section 852 of the Internal Revenue Code, the taxability of this
distribution will be reported on the Form 1099-DIV for 2004.
**Pursuant to Section 852 of the Internal Revenue Code, the taxability of this
distribution will be reported on the Form 1099-DIV for 2005.
FOR CORPORATE SHAREHOLDERS
25% of the ordinary income distributed by the Fund for the year ended December
31, 2004, qualifies for the corporate dividends received deduction.
41
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
POSITION TERM OF PORTFOLIOS IN
WITH LIBERTY OFFICE AND FUND COMPLEX OTHER
NAME (AGE) ALL-STAR LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN DIRECTORSHIPS
AND ADDRESS EQUITY FUND SERVICE DURING PAST FIVE YEARS BY TRUSTEE HELD
DISINTERESTED TRUSTEES
John A. Benning (70) Trustee Trustee Retired since December, 1999; 2 TT International USA
c/o Liberty Asset Since 2002; Senior Vice President, General (investment company)
Management Company Term expires Counsel and Secretary, Liberty
One Financial Center 2006 Financial Companies Inc.
Boston, MA 02111 (July, 1985 to December,
1999); Vice President,
Secretary and Director,
Liberty Asset Management
Company (August, 1985 to
December, 1999).
James E. Grinnell (75) Trustee Trustee Since Private investor since 2 None
c/o Liberty Asset 1986; Term November 1988; President and
Management Company Expires 2005 Chief Executive Officer,
One Financial Center Distribution Management
Boston, MA 02111 Systems, Inc. (1983 to May
1986); Senior Vice President,
Operations, The Rockport
Company (importer and
distributor of shoes) (May
1986 to November 1988).
Richard W. Lowry (68) Chairman Trustee Since Private Investor since 1987 106 None
c/o Liberty Asset and 1986; Term (formerly Chairman and Chief
Management Company Trustee Expires 2007 Executive Officer, U.S.
One Financial Center Plywood Corporation (building
Boston, MA 02111 products manufacturer).
John J. Neuhauser (61) Trustee Trustee Since Academic Vice President and 106 Saucony, Inc.
c/o Liberty Asset 1986; Term Dean of Faculties since August (athletic footwear)
Management Company Expires 2007 1999, Boston College (formerly
One Financial Center Dean, Boston College School of
Boston, MA 02111 Management from September 1977
to September 1999).
INTERESTED TRUSTEE
William E. Mayer* (64) Trustee Trustee Since Managing Partner, Park Avenue 106 Lee Enterprises
c/o Liberty Asset 1998; Term Equity Partners (private (print media); WR
Management Company Expires 2006 equity) since February 1999 Hambrecht + Co
One Financial Center (formerly Founding Partner, (financial service
Boston, MA 02111 Development Capital, LLC from provider)
November 1996 to February
1999).
*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 + C0.
42
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PRINCIPAL OCCUPATIONS(S) DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------
OFFICERS
William R. Parmentier, Jr. (52) President and 1998 President (since June 1998) and Chief
Liberty Asset Management Company Chief Executive Investment Officer (since April 1995), Senior
One Financial Center Officer Vice President (May 1995 to June 1998),
Boston, MA 02111 Liberty Asset Management.
Mark T. Haley, CFA (40) Vice President 1999 Vice President-Investments (since January
Liberty Asset Management Company 1999), Director of Investment Analysis
One Financial Center (December 1996 to December 1998), Investment
Boston, MA 02111 Analyst (January 1994 to November 1996),
Liberty Asset Management.
Fred H. Wofford (49) Vice President 2003 Director of Funds Operations (since March
Liberty Asset Management Company 2003), Liberty Asset Management (formerly
One Financial Center Director of Investment Compliance, Deutsche
Boston, MA 02111 Asset Management from February 1999 to March
2003; Manager of Fund Administration,
BankBoston 1784 Funds from November 1995 to
February 1999).
J. Kevin Connaughton (40) Treasurer 2000 Treasurer of the Columbia Funds since October
One Financial Center 2003 and of the Liberty All-Star Funds since
Boston, MA 02111 December 2000 (formerly Chief Accounting
Officer and Controller of the Columbia Funds
and of the Liberty All-Star Funds from
February 1998 to October 2000); Vice President
of Columbia Management Advisors, Inc. since
April 2003; Treasurer of the Galaxy Funds
since September 2002; (formerly Treasurer of
the Columbia Management Multi-Strategy Hedge
Fund, LLC from December 2002 to December 2004;
formerly Vice President of Colonial Management
Associates, Inc. from February 1998 to October
2000).
Mary Joan Hoene (55) Chief 2004 Senior Vice President and Chief Compliance
40 West 57th Street Compliance Officer of the Columbia Funds, the Galaxy
New York, NY 10019 Officer Fund, Nations Funds and of the Liberty
All-Star Funds since August 2004 and the BACAP
Registered Hedge Funds since October 2004
(formerly Partner, Carter, Ledyard & Milburn
LLP from January 2001 to August 2004; Counsel,
Carter, Ledyard & Milburn LLP from November
1999 to December 2000; Vice President and
Counsel, Equitable Life Assurance Society of
the United States from April 1998 to November
1999).
43
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PRINCIPAL OCCUPATIONS(S) DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------
OFFICERS (CONTINUED)
Michael G. Clarke (35) Chief 2004 Chief Accounting Officer of the Columbia Funds
One Financial Center Accounting and of the Liberty All-Star Funds since
Boston, MA 02111 Officer October 2004 (formerly Controller of the
Columbia Funds and of the Liberty All-Star
Funds from May 2004 to October 2004; Assistant
Treasurer from June, 2002 to May 2004; Vice
President, Product Strategy & Development of
the Liberty Funds Group from February 2001 to
June 2002; Assistant Treasurer of the Liberty
Funds and of the Liberty All-Star Funds from
August 1999 to February 2001; Audit Manager,
Deloitte & Touche LLP from May 1997 to August
1999).
Jeffrey R. Coleman (35) Controller 2004 Controller of the Columbia Funds and of the
One Financial Center Liberty All-Star Funds since October 2004
Boston, MA 02111 (formerly Vice President of CDC IXIS Asset
Management Services, Inc. and Deputy Treasurer
of the CDC Nvest Funds and Loomis Sayles Funds
from February 2003 to September 2004;
Assistant Vice President of CDC IXIS Asset
Management Services, Inc. and Assistant
Treasurer of the CDC Nvest Funds from August
2000 to February 2003; Tax Manager of PFPC
Inc. from November 1996 to August 2000).
David A. Rozenson (50) Secretary 2003 Secretary of the Liberty All-Star Funds since
One Financial Center December 2003; Associate General Counsel of
Boston, MA 02111 Bank of America Corporation since April 2004;
Senior Counsel of FleetBoston Financial
Corporation from 1996 to April 2004; Associate
General Counsel of Columbia Management Group
from November 2002 to April 2004.
44
[ALL STAR(R) EQUITY FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High 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 43010
Providence, Rhode Island 02940-3010
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*
James E. Grinnell*
Richard W. Lowry*, Chairman
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr.,
President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
Fred H. Wofford, Vice President
J. Kevin Connaughton, Treasurer
Mary Joan Hoene, Chief Compliance Officer
Michael G. Clarke, Chief Accounting Officer
Jeffrey R. Coleman, Controller
David A. Rozenson, Secretary
*Member of the audit committee.
A description of the fund's proxy voting policies and procedures is available
(i) on the Securities and Exchange Commission's website at www.sec.gov, and (ii)
without charge, upon request, by calling 1-800-542-3863. Information regarding
how the fund voted proxies relating to portfolio securities during the 12-month
period ended June 30, 2004 is available from the SEC's website. Information
regarding how the fund voted proxies relating to portfolio securities is also
available at www.all-starfunds.com.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, DC. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
[USA LISTED NYSE LOGO]
[ALL STAR(R) EQUITY FUND LOGO]
Liberty Asset Management Company,
Fund Manager
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
[USA LISTED NYSE LOGO]
[A MEMBER OF THE]
[CLOSED-END FUND ASSOCIATION, INC. LOGO]
www.closed-endfunds.com
[IMAGE OF THE NEW YORK STOCK EXCHANGE]
[FACADE USED WITH PERMISSION OF NYSE]
ITEM 2. CODE OF ETHICS.
(a) The registrant has, as of the end of the period covered by this report,
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party.
(b) During the period covered by this report, there were not any amendments
to a provision of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were not any waivers or
implicit waivers to a provision of the code of ethics adopted in 2(a)
above.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Audit Committee is composed of four of the registrant's
independent directors who are not affiliated with the registrant's investment
adviser. The Board has determined that each of the audit committee members is
"financially literate" and that at least one member has "accounting or related
financial management expertise" as used in the New York Stock Exchange
definitions of the terms.
Under the Sarbanes-Oxley Act, if the Board of Directors has not
determined that a "financial expert," a new term based on criteria contained in
the Sarbanes-Oxley Act, is serving on the audit committee, it must disclose this
fact and explain why the committee does not have such an expert. The Board of
Directors has determined that none of the members of its audit committee meets
the technical requirements of the definition. Moreover, it believes that for the
following reasons it is not necessary for a registered investment company such
as the registrant, with an audit committee that meets the New York Stock
Exchange requirements of financial literacy, to have a "financial expert" as a
member of the committee.
1. The financial statements of and accounting principles applying to
registered investment companies such as the registrant are relatively
straightforward and transparent compared to those of operating companies.
The significant accounting
issues are valuation of securities and other assets (regulated under the
Investment Company Act of 1940 (the "1940 Act") and computed daily),
accrual of expenses, allocation of joint expenses shared with other
entities, such as insurance premiums, and disclosures of all related party
transactions. Equally important is a knowledge of the tax laws applying to
registered investment companies. None of the accounting issues involving
corporate America that have received recent publicity, such as
sophisticated derivative transactions and special purpose entities, are
present in financial reporting for registered investment companies.
2. During the years that the registrant has been filing financial reports
under the 1940 Act since its inception in 1986 there has never been a
requirement for a financial report or statement to be restated.
3. The current members of the audit committee have many years of aggregate
experience serving on this audit committee and in the Board's judgment,
through this experience and experience with other public corporation's
financial affairs, they have an understanding of the relevant generally
accepted accounting principles governing the registrant's financial
statements, tax laws applying to the registrant, the registrant's internal
accounting controls and audit committee functions necessary to satisfy the
objectives of the Sarbanes-Oxley Act with respect to the financial
statements, auditing process and internal controls of the registrant.
4. The audit committee has the capability of employing a consultant who
satisfies the technical definition of a "financial expert" and will do so
from time to time if circumstances warrant.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Aggregate Audit Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are approximately as follows:
2004 2003
$38,700 $33,000
Audit Fees include amounts related to the audit of the registrant's annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years. In fiscal year 2004, Audit Fees include a proxy review and issuance of a
consent letter in connection with a rights offering.
(b) Aggregate Audit-Related Fees billed by the principal accountant for
professional services rendered during the fiscal years ended December 31, 2004
and December 31, 2003 are approximately as follows:
2004 2003
$4,000 $4,000
Audit-Related Fees include amounts for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported in Audit Fees
above. In both fiscal years 2004 and 2003, Audit-Related Fees include certain
agreed-upon procedures performed for semi-annual shareholder reports.
(c) Aggregate Tax Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are approximately as follows:
2004 2003
$2,600 $2,600
Tax Fees in both fiscal years 2004 and 2003 consist primarily of the review of
annual tax returns and include amounts for professional services by the
principal accountant for tax compliance, tax advice and tax planning.
(d) Aggregate All Other Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are as follows:
2004 2003
$0 $0
All Other Fees include amounts for products and services provided by the
principal accountant, other than the services reported in paragraphs (a) through
(c) above.
None of the amounts described in paragraphs (a) through (d) above were approved
pursuant to the "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
I. GENERAL OVERVIEW
The Audit Committee of the registrant has adopted a formal policy (the "Policy")
which sets forth the procedures and the conditions pursuant to which the Audit
Committee will pre-approve (i) all audit and non-audit (including audit related,
tax and all other) services provided by the registrant's independent auditor to
the registrant and individual funds (collectively "Fund Services"), and (ii) all
non-audit services provided by the registrant's independent auditor to the
funds' adviser or a control affiliate of the adviser, that relate directly to
the funds' operations and financial reporting (collectively "Fund-related
Adviser Services"). A "control affiliate" is an entity controlling, controlled
by, or under
common control with the adviser that provides ongoing services to the funds, and
the term "adviser" is deemed to exclude any unaffiliated sub-adviser whose role
is primarily portfolio management and is sub-contracted or overseen by another
investment adviser. The adviser and control affiliates are collectively referred
to as "Adviser Entities."
The Audit Committee uses a combination of specific (on a case-by-case basis as
potential services are contemplated) and general (pre-determined list of
permitted services) pre-approvals. Unless a type of service has received general
pre-approval, it will require specific pre-approval by the Audit Committee if it
is to be provided by the independent auditor.
The Policy does not delegate the Audit Committee's responsibilities to
pre-approve services performed by the independent auditor to management.
II. GENERAL PROCEDURES
On an annual basis, the Fund Treasurer and/or Director of Trustee Administration
shall submit to the Audit Committee a schedule of the types of Fund Services and
Fund-related Adviser Services that are subject to general pre-approval.
These schedules will provide a description of each type of service that is
subject to general pre-approval and, where possible, will provide estimated fees
for each instance of providing each service. This general pre-approval and
related fees (where provided) will generally cover a one-year period (for
example, from June 1 through May 31 of the following year). The Audit Committee
will review and approve the types of services and review the projected fees for
the next one-year period and may add to, or subtract from, the list of general
pre-approved services from time to time, based on subsequent determinations.
This approval acknowledges that the Audit Committee is in agreement with the
specific types of services that the independent auditor will be permitted to
perform. The fee amounts will be updated to the extent necessary at other
regularly scheduled meetings of the Audit Committee.
In addition to the fees for each individual service, the Audit Committee has the
authority to implement a fee cap on the aggregate amount of non-audit services
provided to an individual fund.
If, subsequent to general pre-approval, a fund, its investment adviser or a
control affiliate determines that it would like to engage the independent
auditor to perform a service that requires pre-approval and that is not included
in the general pre-approval list, the specific pre-approval procedure shall be
as follows:
- A brief written request shall be prepared by management detailing the
proposed engagement with explanation as to why the work is proposed to
be performed by the independent auditor;
- The request should be addressed to the Audit Committee with copies to
the Fund Treasurer and/or Director of Trustee Administration;
- The Fund Treasurer and/or Director of Trustee Administration will
arrange for a discussion of the service to be included on the agenda
for the next regularly scheduled Audit Committee meeting, when the
Committee will discuss the proposed engagement and approve or deny the
request.
- If the timing of the project is critical and the project needs to
commence before the next regularly scheduled meeting, the Chairperson
of the Audit Committee may approve or deny the request on behalf of
the Audit Committee, or, in the Chairperson's discretion, determine to
call a special meeting of the Audit Committee for the purpose of
considering the proposal. Should the Chairperson of the Audit
Committee be unavailable, any other member of the Audit Committee may
serve as an alternate for the purpose of approving or denying the
request. Discussion with the Chairperson (or alternate, if necessary)
will be arranged by the Fund Treasurer and/or Director of Trustee
Administration. The independent auditor will not commence any such
project unless and until specific approval has been given.
III. CERTAIN OTHER SERVICES PROVIDED TO ADVISER ENTITIES
The Audit Committee recognizes that there are cases where services proposed to
be provided by the independent auditor to the adviser or control affiliates are
not Fund-related Adviser Services within the meaning of the Policy, but
nonetheless may be relevant to the Audit Committee's ongoing evaluation of the
auditor's independence and objectivity with respect to its audit services to the
funds. As a result, in all cases where an Adviser Entity engages the independent
auditor to provide audit or non-audit services that are not Fund Services or
Fund-related Adviser Services, were not subject to pre-approval by the Audit
Committee, and the projected fees for any such engagement (or the aggregate of
all such engagements during the period covered by the Policy) exceeds a
pre-determined threshold established by the Audit Committee; the independent
auditor, Fund Treasurer and/or Director of Trustee Administration will notify
the Audit Committee not later than its next meeting. Such notification shall
include a general description of the services provided, the entity that is to be
the recipient of such services, the timing of the engagement, the entity's
reasons for selecting the independent auditor, and the projected fees. Such
information will allow the Audit Committee to consider whether non-audit
services provided to the adviser and Adviser Entities, which were not subject to
Audit Committee pre-approval, are compatible with maintaining the auditor's
independence with respect to the Funds.
IV. REPORTING TO THE AUDIT COMMITTEE
The Fund Treasurer or Director of Trustee Administration shall report to the
Audit Committee at each of its regular meetings regarding all Fund Services or
Fund-related Adviser Services initiated since the last such report was rendered,
including:
- A general description of the services, and
- Actual billed and projected fees, and
- The means by which such Fund Services or Fund-related Adviser Services
were pre-approved by the Audit Committee.
In addition, the independent auditor shall report to the Audit Committee
annually, and no more than 90 days prior to the filing of audit reports with the
SEC, all non-audit services provided to entities in the funds' "investment
company complex," as defined by SEC rules, that did not require pre-approval
under the Policy.
V. AMENDMENTS; ANNUAL APPROVAL BY AUDIT COMMITTEE
The Policy may be amended from time to time by the Audit Committee. Prompt
notice of any amendments will be provided to the independent auditor, Fund
Treasurer and Director of Trustee Administration. The Policy shall be reviewed
and approved at least annually by the Audit Committee.
*****
(e)(2) The percentage of services described in paragraphs (b) through (d) of
this Item approved pursuant to the "de minimis" exception under paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X during both fiscal years ended
December 31, 2004 and December 31, 2003 was zero.
(f) Not applicable.
(g) All non-audit fees billed by the registrant's accountant for services
rendered to the registrant for the fiscal years ended December 31, 2004 and
December 31, 2003 are disclosed in (b) through (d) of this Item.
During the fiscal years ended December 31, 2004 and December 31, 2003, there
were no Audit-Related Fees, Tax Fees or All Other Fees that were approved for
services to the investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser) and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant under
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
The percentage of Audit-Related Fees, Tax Fees and All Other Fees required to be
approved under paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X that were
approved under the "de minimis" exception during both fiscal years ended
December 31, 2004 and December 31, 2003 was zero.
(h) The registrant's Audit Committee of the Board of Directors has considered
whether the provision of non-audit services that were rendered to the
registrant's adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that
provides ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with
maintaining the principal accountant's independence. The Audit Committee
determined that the provision of such services is compatible with maintaining
the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C.
78c(a)(58)(A)). John A. Benning, James E. Grinnell, Richard W. Lowry and John J.
Neuhauser are each independent trustees and collectively constitute the entire
Audit Committee.
ITEM 6. SCHEDULE OF INVESTMENTS
The registrant's "Schedule I - Investments in securities of unaffiliated
issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this Form
N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Fund has delegated to Liberty Asset Management Company (the "Advisor") the
responsibility to vote proxies relating to portfolio securities held by the
Fund. In deciding to delegate this responsibility to the Advisor, the Board of
Trustees of the Trust reviewed and approved the policies and procedures adopted
by the Advisor. These included the procedures that the Advisor follows when a
vote presents a conflict between the interests of the Fund and its shareholders
and the Advisor, its affiliates, its other clients or other persons.
The Advisor's policy is to vote all proxies for Fund securities in a manner
considered by the Advisor to be in the best interest of the Fund and its
shareholders without regard to any benefit to the Advisor, its affiliates, its
other clients or other persons. The Advisor examines each proposal and votes
against the proposal, if, in its judgment, approval or adoption of the proposal
would be expected to impact adversely the current or potential market value of
the issuer's securities. The Advisor also examines each proposal and votes the
proxies against the proposal, if, in its judgment, the proposal would be
expected to affect adversely the best interest of the Fund. The Advisor
determines the best interest of the Fund in light of the potential economic
return on the Fund's investment.
The Advisor addresses potential material conflicts of interest by having
predetermined voting guidelines. For those proposals that require special
consideration or in instances where special circumstances may require varying
from the predetermined guideline, the Advisor's Proxy Committee determines the
vote in the best interest of the Fund, without consideration of any benefit to
the Advisor, its affiliates, its other clients or other persons. The Advisor's
Proxy Committee includes a representative from Liberty Asset Management Company
and representatives from the Advisor's equity investments and equity research
functions. In addition to the responsibilities described above, the Proxy
Committee has the responsibility to review, on an annual basis, the Advisor's
proxy voting policies to ensure consistency with internal policies and
regulatory agency policies and to develop additional voting guidelines to assist
in the review of proxy proposals.
The Proxy Committee may vary from the predetermined guideline if it determines
that voting on the proposal according to the predetermined guideline would be
expected to impact adversely the current or potential market value of the
issuer's securities or to affect adversely the best interest of the client.
References to the best interest of a client refer to the interest of the client
in terms of the potential economic return on the client's investment. In
determining the vote on any proposal, the Proxy Committee does not consider any
benefit other than benefits to the owner of the securities to be voted. A member
of the Proxy Committee is prohibited from voting on any proposal for which he or
she has a conflict of interest by reason of a direct relationship with the
issuer or other party affected by a given proposal. Persons making
recommendations to the Proxy Committee or its members are required to disclose
to the Committee any relationship with a party making a proposal or other matter
known to the person that would create a potential conflict of interest.
The Advisor has retained Institutional Shareholder Services ("ISS"), a third
party vendor, to implement its proxy voting process. ISS provides proxy
analysis, record keeping services and vote disclosure services.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the six month period ended December 31, 2004, there were no purchases
made by or on behalf of the registrant or any "affiliated purchaser," as defined
in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934 ("Exchange Act"),
of shares or other units of any class of the registrant's equity securities that
are registered by the registrant pursuant to Section 12 of the Exchange Act.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have not been any material changes to the procedures by which shareholders
may recommend nominees to the registrant's board of directors, since those
procedures were last disclosed in response to the requirements of Item
7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officers, based on their evaluation of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing of this
report, have concluded that such controls and procedures are adequately
designed to ensure that information required to be disclosed by the
registrant in Form N-CSR is accumulated and communicated to the
registrant's management, including the principal executive officer and
principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter of
the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR
attached hereto as Exhibit 99.CODE ETH.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Liberty All-Star Equity Fund
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By (Signature and Title) /S/ William R. Parmentier, Jr.
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William R. Parmentier, Jr., President
Date March 4, 2005
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ William R. Parmentier, Jr.
--------------------------------------------------------
William R. Parmentier, Jr., President
Date March 4, 2005
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By (Signature and Title) /S/ J. Kevin Connaughton
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J. Kevin Connaughton, Treasurer
Date March 4, 2005
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