ANNUAL REPORT 2001
[GRAPHIC] [ALL-STAR LOGO]
[GRAPHIC]
LIBERTY ALL-STAR EQUITY FUND
A SINGLE INVESTMENT...
A DIVERSIFIED CORE PORTFOLIO
Only one mutual fund offers:
- A diversified, multi-managed portfolio of growth and value stocks
- Exposure to all of the industry sectors that make the U.S. economy the
world's most dynamic
- Access to institutional-quality investment managers
- Objective and ongoing manager evaluation
- Active portfolio rebalancing
- A quarterly fixed distribution policy
- The power of more than $1.1 billion in assets
- Listing on the New York Stock Exchange (ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: FEBRUARY 2002
Two thousand one marked the fifteenth anniversary of the Liberty All-Star Equity
Fund, one of the first funds of its kind to bring the benefits of
multi-management to the individual investor. The year also marked the second
consecutive negative year for the stock market - as measured by the S&P 500
Index - a phenomenon not seen since 1973-74. Despite the difficulties, the Fund
performed well on a relative basis over the course of the year based on both net
asset value (NAV) and market price. Shareholders should take some comfort in the
fact that Fund shares valued at market price with dividends reinvested were
unchanged during a year when most market indices experienced double-digit
declines. Of greater significance than any one year, however, is the Fund's
consistent performance over its 15-year history, a subject about which I will
say more momentarily.
[GRAPHIC]
Returning to 2001, the following table summarizes key performance data for
the fourth quarter and the full year. Note that in the market rebound during the
fourth quarter, the Fund's NAV outperformed the Lipper Large-Cap Core Mutual
Fund Average, as well as the broader market, as measured by the S&P 500 Index.
The full year was more challenging; although the Fund's NAV gave up ground, the
Fund still outperformed the Lipper Large-Cap Core benchmark and narrowly trailed
the S&P 500. Further, as I have already pointed out, the Fund's market price
outperformed both indices by an even wider margin.
FUND STATISTICS AND SHORT-TERM PERFORMANCE
PERIODS ENDING DECEMBER 31, 2001 4TH QUARTER 2001
----------------------------------------------------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND
Year End Net Asset Value (NAV) $10.65
Year End Market Price $11.09
Year End Premium 4.1%
Dividends Paid $0.25 $1.20
Market Price Trading Range $10.40 to $11.85 $8.60 to $13.57
Premium (Discount) Range 4.0% to 14.0% (5.1)% to 15.7%
Shares Valued at NAV 15.1% (13.0)%
Shares Valued at NAV with Dividends Reinvested 14.9% (12.7)%
Shares Valued at Market Price with Dividends Reinvested 6.9% 0.0%
Lipper Large-Cap Core Mutual Fund Average 10.6% (13.8)%
S&P 500 Index 10.7% (11.9)%
1
LONG-TERM PERFORMANCE SUMMARY ANNUALIZED RATES OF RETURN
PERIODS ENDING DECEMBER 31, 2001 -------------------------------------------------------
3 YEARS 5 YEARS 10 YEARS 15 YEARS
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at NAV 0.8% 9.2% 11.1% 12.3%
Shares Valued at NAV with Dividends Reinvested 1.5 9.7 11.4 13.0
Shares Valued at Market Price with Dividends Reinvested 6.2 11.9 12.3 12.9
Lipper Large-Cap Core Mutual Fund Average (1.6) 8.2 11.0 11.9
S&P 500 Index (1.0) 10.7 12.9 13.7
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in all the
Fund's rights offerings were exercised. Figures shown for the unmanaged S&P 500
Index are total returns, including income.
I would like to highlight additional relative performance information that
the table does not show, namely, that in the fourth quarter the Fund's 14.9
percent NAV reinvested return ranked in the top 5 percent of the Lipper
Large-Cap Core universe. For the full year, the Fund's NAV results were also
above average in that comparative Lipper universe.
In a report that marks the Fund's fifteenth anniversary, it is appropriate
to look back beyond the past year to gauge the Fund's performance through time.
Once again, the story is a positive one. For three- and five-year periods the
Fund shows similarly consistent NAV based results, as it ranked in the 15th and
36th percentiles (1 = Best; 100 = Worst) within the Lipper Large Cap Core
universe, respectively. The Fund's 15-year return places it in the 29th
percentile and, importantly, as the chart on page 8 shows, with less volatility
than the universe of Lipper Large Cap Core funds that have a 15-year history.
Those long-term results were delivered with the consistency of return for
which the Fund was originally designed. Borrowing from a quote that appeared in
All-Star's very first Annual Report, the Fund "is intended to result in more
consistent and less volatile investment performance over changing market cycles"
(the full quote appears on page 8). As the timeline appearing on pages 4 and 5
of this Annual Report so graphically illustrates, the Fund has operated through
times of tumult and times of relative calm ... through wars and recessions ...
through tragedy and triumph. The most recent year, 2001, presented more than its
sharE of challenge. Through all of these times, both good and bad, the Fund
remained true to its disciplines and Liberty Asset Management Company ensured
that the investment managers did not deviate from their respective growth and
value styles. To underscore the validity of our approach, it is worth observing
that the Fund has outperformed the Lipper Large-Cap Core Mutual Fund Average for
every trailing annualized period ending December 31, 2001 (i.e. 1, 2, 3, 4...15
years).
2
Also, during the past 15 years, only one other fund in that universe having
a 15-year record has delivered a better combination of return and consistency
than All-Star has, as the graph on page 8 illustrates. As to the future, we make
no prediction, but we continue today to apply the same thinking and investment
discipline to managing the Fund as its founders did in 1986. Liberty All-Star
Equity Fund has proven itself through time, and we are confident it will
continue to do so.
On behalf of the entire team at Liberty Asset Management Company, I would
like to take this opportunity to thank you for your continuing support of the
Fund. As always, we will continue to work in the best long-term interests of
All-Star shareholders.
Sincerely,
/s/ William R. Parmentier
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
3
LIBERTY ALL-STAR EQUITY FUND: CHARTING OUR 15 YEARS
[CHART]
LOOKING BACK ON SOME OF THE HIGHLIGHTS OVER AN HISTORIC PERIOD, 1986 - 2001
ALL-STAR MARKET ALL-STAR MARKET
PRICE WITH PRICE PLUS DIVIDENDS
DIVIDENDS REINVESTED TAKEN IN CASH
-----------------------------------------------------------------------------------------------------------------------------
1986
[GRAPHIC] LIBERTY ALL-STAR EQUITY FUND COMPLETES
PUBLIC OFFERING IN OCTOBER OF 51 MILLION SHARES Dec-86 9.62500 9.62500
1987 9.62500 9.62500
STOCK MARKET CRASH SENDS DOW JONES INDUSTRIAL AVERAGE 9.50000 9.50000
DOWN 22.6% ON OCTOBER 19 9.42188 9.42500
9.17063 9.17500
8.41688 8.42500
9.19800 9.20500
9.95400 9.95500
10.41300 10.43000
9.88200 9.93000
7.54875 7.80500
6.31350 6.68000
Dec-87 6.84000 7.18000
1988 7.98000 8.18000
NEW YORK STOCK EXCHANGE PROGRAM TRADING CURBS 7.98000 8.18000
INTRODUCED 7.74225 7.97000
7.45550 7.72000
7.45550 7.72000
8.26000 8.42000
8.11250 8.29500
7.81750 8.04500
8.49800 8.62000
8.34625 8.49500
8.64975 8.74500
Dec-88 9.04075 9.07000
1989 9.19663 9.19500
[GRAPHIC] FALL OF THE BERLIN WALL 8.72900 8.82000
9.14138 9.16500
9.62250 9.54000
9.94325 9.79000
10.08788 9.90500
10.41863 10.15500
10.91475 10.53000
11.07438 10.65500
10.73363 10.40500
11.07438 10.65500
Dec-89 11.57475 11.02000
1990 11.04863 10.64500
[GRAPHIC] IRAQ INVADES KUWAIT 11.22400 10.77000
11.35575 10.86500
11.17550 10.74000
12.07675 11.36500
12.24300 11.49000
12.24300 11.49000
10.94450 10.61500
10.70300 10.46000
11.08525 10.71000
11.46750 10.96000
Dec-90 12.16750 11.42000
1991 12.56000 11.67000
[GRAPHIC] USSR BREAKS UP 14.13000 12.67000
14.91100 13.17000
15.11250 13.29500
16.12000 13.92000
15.50625 13.54500
15.50625 13.54500
15.50625 13.54500
16.98000 14.43000
16.76775 14.30500
16.34325 14.05500
Dec-91 18.71575 15.44000
1992 18.71575 15.44000
BORIS YELTSIN AND GEORGE BUSH FORMALLY END COLD WAR; 19.15100 15.69000
CUTS IN MILITARY BUDGETS IN THE U.S. CONTRIBUTE 18.75300 15.46000
BUDGET SURPLUSES IN FOLLOWING YEARS 18.75300 15.46000
19.19950 15.71000
19.00700 15.60500
20.15200 16.23000
19.46500 15.85500
19.24950 15.74000
19.71900 15.99000
20.65800 16.49000
Dec-92 21.41563 16.88500
1993 21.17500 16.76000
NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) ENACTED 21.41563 16.88500
21.47712 16.91000
21.22050 16.78000
21.71400 17.03000
22.00013 17.16500
22.25300 17.29000
22.50588 17.41500
22.81400 17.56000
23.07325 17.68500
23.39700 17.83000
Dec-93 24.04113 18.13500
A 15-YEAR DIARY
1986
- Seven Astronauts killed in Challenger space shuttle disaster
1987
- Alan Greenspan becomes Federal Reserve chairman
1988
- RJR Nabisco leveraged buyout
1989
- Japan's Nikkei 225 Index hits record 38915 - up 492% for the decade
- Junk bond market meltdown
- U.S. invades Panama
1990
- Recession begins (July)
- Junk bond king Michael Milken pleads guilty, ending years of financial
engineering at Drexel Burnham
- Bubble bursts in Japan's stock market
- Gulf War begins
1991
- Recession ends (March)
- Gulf War ends
1992
- World Wide Web established
- Bill Clinton elected President
- Riots in Los Angeles
1993
- World Trade Center bombing
1994
- Orange County, California, files for bankruptcy
1995
- Oklahoma City bombing
- Mergers: Walt Disney and Capital Cities/ABC
1996
- Fed Chair Alan Greenspan utters famous "irrational exuberance" warning
- President Clinton re-elected
- Mergers: Boeing and McDonnell Douglas
4
[CHART]
ALL-STAR MARKET ALL-STAR MARKET
PRICE WITH PRICE PLUS DIVIDENDS
DIVIDENDS REINVESTED TAKEN IN CASH
-----------------------------------------------------------------------------------------------------------------------------
1994 24.04113 18.13500
[GRAPHIC] NASDAQ SURPASSES NEW YORK STOCK EXCHANGE 23.23075 17.76000
IN ANNUAL SHARE VOLUME 22.15000 17.27000
23.25750 17.77000
23.25750 17.77000
22.70000 17.52000
22.98375 17.64500
22.99888 17.64500
22.70775 17.52000
21.83438 17.14500
20.37875 16.52000
Dec-94 20.35750 16.51000
1995 20.95625 16.76000
NETSCAPE IPO; STOCK IS PRICED AT $28 AND RISES TO $71 21.85438 17.13500
ON THE FIRST DAY OF TRADING 23.61975 17.87500
23.92650 18.00000
23.31300 17.75000
25.14000 18.50000
25.45425 18.62500
25.76850 18.75000
26.76750 19.14500
26.76750 19.14500
27.41250 19.39500
Dec-95 28.77525 19.92500
1996 29.10600 20.05000
[GRAPHIC] THE "GRANDDADDY" OF BENCHMARKS, THE DOW JONES 29.43675 20.17500
INDUSTRIAL AVERAGE, MARKS ITS CENTENNIAL 30.86038 20.71500
30.18213 20.46500
29.50388 20.21500
29.97100 20.39000
27.88000 19.64000
29.97100 20.39000
31.44900 20.92000
31.80638 21.04500
33.05250 21.48000
Dec-96 33.43500 21.61000
1997 34.54950 21.98500
THAILAND DEVALUES THE BAHT, TRIGGERING ASIAN ECONOMIC 35.29250 22.23500
CRISIS 35.84925 22.43000
36.23063 22.55500
38.13750 23.18000
40.45556 23.93750
42.40994 24.56250
41.62819 24.31250
45.28475 25.47500
41.67800 24.35000
43.77150 25.00250
Dec-97 44.95631 25.36250
1998 45.16738 25.42500
RUSSIA DEVALUES THE RUBLE; U.S. HAS FIRST FEDERAL BUDGET 47.70013 26.17500
SURPLUS SINCE 1969 49.29075 26.65000
47.99363 26.27500
45.39938 25.52500
48.68644 26.45750
48.01950 26.27000
37.34850 23.27000
42.55913 24.73500
43.70319 25.04750
46.67775 25.86000
Dec-98 48.64500 26.38750
1999 48.41000 26.32500
[GRAPHIC] EURO IS LAUNCHED 47.70500 26.13750
49.43063 26.60250
50.63625 26.91500
50.15400 26.79000
54.53250 27.91000
53.54100 27.66000
48.83138 26.47250
47.89300 26.25000
49.42150 26.62500
46.36450 25.87500
Dec-99 46.49569 25.90250
2000 45.70763 25.71500
BUSH DECLARED PRESIDENT AFTER MONTH-LONG DELAY 45.18225 25.59000
48.40831 26.35750
48.40831 26.35750
48.67875 26.42000
54.80294 27.84250
55.91569 28.09250
57.86300 28.53000
60.09938 29.02500
59.24081 28.83750
54.94800 27.90000
Dec-00 58.28625 28.63500
2001 63.58500 29.76000
[GRAPHIC] 9/11: U.S. ATTACKED BY TERRORISTS; WORLD TRADE CENTER 62.69095 29.54000
DESTROYED; PENTAGON HIT; UNITED AIRLINES FLIGHT 93 BROUGHT DOWN 59.30225 28.84000
IN PENNSYLVANIA 63.61074 29.73000
64.51900 29.90000
65.01530 30.00000
62.33528 29.46000
60.84975 29.06000
54.53370 27.83000
56.99850 28.31000
59.14125 28.71000
Dec-01 58.30013 28.55000
USA
LISTED
NYSE
1997
- Dow Jones Industrial Average surpasses 7000 and 8000
- Princess Diana killed in Paris auto accident
- Mergers: WorldCom and MCI; Morgan Stanley and Dean Witter
1998
- Long-Term Capital Management bail-out
- Nikkei 225 sags to 13842
- Mergers: Citicorp and Travelers; Exxon and Mobil; Daimler-Benz and Chrysler
1999
- Dow Jones Industrial Average hits 10000
- NASDAQ Composite Index rises 86%
- John Glenn becomes the oldest person in space at 77
- Mergers: Pfizer and Warner-Lambert; Viacom and CBS
2000
- Economic expansion hits record of 107 months (February)
- S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite Index reach
record highs in first quarter
- Unemployment rate falls below 4% for the first time in 30 years (September)
- NASDAQ Composite ends year off 39%
- Mergers: AOL and Time-Warner; Chase Manhattan and J.P. Morgan
2001
- Eleven interest rate reductions by the Federal Reserve lower the Fed funds
rate to 1.75%, a 40-year low
- Unemployment rate reverses course, hits 5.8% (December)
- In December, industrial production falls for 14 of the past 15 months
- GE and Honeywell merger abandoned
- Enron files for bankruptcy
- Argentina's economy in turmoil
5
MANAGEMENT OVERVIEW
What Shareholders Should Know About Liberty All-Star Equity Fund
[GRAPHIC]
GROWTH
MULTIPLE AND VALUE
MANAGERS MANAGERS
ACTIVE
PORTFOLIO DISTRIBUTION
REBALANCING POLICY
LIBERTY ALL-STAR EQUITY FUND COMBINES A RANGE OF DESIRABLE ATTRIBUTES IN A
SINGLE FUND.
Five aspects of Liberty All-Star Equity Fund especially important to
shareholders are:
- Multi-management investment approach
- Alignment with shareholder interests
- Active portfolio rebalancing
- Closed-end structure
- Distribution policy
As the Fund's multi-management investment approach is discussed more thoroughly
on pages 8 and 9, this analysis will concentrate on the other points, starting
with shareholder interests.
The management of Liberty Asset Management Company (LAMCO) believes that it
has achieved excellent alignment of shareholder and fund advisor interests since
the Fund's inception in 1986. LAMCO, the Fund Manager, was established in that
year. LAMCO's function is different from most asset management companies in that
instead of managing a portfolio of stocks, we manage a portfolio of investment
managers. We look at investment management firms in much the same way that a
portfolio manager analyzes a company that's a candidate for investment. We refer
to this as "looking at the four Ps" . . . that is, a focus on each investment
management firm's philosophy, process, people and performance.
In terms of shareholder benefit, that makes the Fund a turnkey investment,
as LAMCO performs all the due diligence, research, selection and monitoring that
would be expected of a professional investment management firm. Using our
expertise, experience and state-of-the-art tools, we select managers for the
Fund and we analyze them on an ongoing basis. LAMCO adds value by selecting best
of breed managers and replacing them when necessary. There are very few mutual
fund products, even if they're multi-managed, that have the objective oversight
that we provide on an ongoing basis.
We are aligned with the investor and shareholder because if a manager is
not performing, then we're not performing. LAMCO has no vested interest in
retaining
6
or keeping managers for any reason other than superior performance relative to
their style. We want what the shareholder wants, and that's better long-term,
and more consistent returns than comparable mutual funds. LAMCO's senior
management are shareholders in the Fund and are compensated in large measure
based on the Fund's performance.
MULTI-MANAGEMENT: A PROVEN STRATEGY
Multi-management is fundamental to All-Star's investment approach and to
LAMCO's investment philosophy. As noted, pages 8 and 9 discuss multi-management,
but it is worth observing in passing that subadvised and/or multi-managed funds
are becoming more popular in the mutual fund industry; subadvised mutual funds,
in fact, are growing at a faster rate than internally managed funds. LAMCO
recognized the value of this approach 15 years ago.
Not only does LAMCO select and continuously monitor the Fund's five
investment managers, it engages in the discipline of active portfolio
rebalancing to maintain the Fund's structural integrity through time. What is
rebalancing? With five managers, it's natural that their various growth and
value styles will cause them to perform differently over time. When LAMCO
rebalances, it takes assets from the outperforming manager or managers and
redeploys those assets among the other manager or managers. In this sense, it's
about taking gains from today's winners and giving them to tomorrow's.
Turning to the Fund's closed-end structure, a closed-end fund is one that
has a fixed number of shares, which are bought and sold on a stock exchange
through a broker or other financial intermediary. By contrast, most mutual funds
are "open-ended" funds that continually offer new shares to investors and redeem
shares when requested by the investor. All-Star is listed on the New York Stock
Exchange (ticker symbol: USA) and is priced just like any other stock traded on
an exchange - that is, by the supply and demand for the stock. Open-ended funds
are not traded on stock exchanges; rather, purchases and redemptions are
transacted at the net asset value price by the fund sponsor.
Why is All-Star a closed-end fund? Because the structure lends itself to
multi-management and to All-Star's objective as a long-term core investment.
Being a closed-end fund with a fixed number of shares allows All-Star's
investment managers to plan more effectively and not be forced to react to
temporary stock market fluctuations and untimely cash flows. The managers are
strictly focused on stock selection - not what the next day's inflows or
outflows will be. Another advantage to closed-end funds is lower expenses. For
example, because there's a fixed shareholder base and, thus, fewer transactions,
transfer agency fees are lower.
DISTRIBUTION POLICY PROVIDES FLEXIBILITY
Since 1988, the Fund has had a policy of paying annual distributions on its
common shares totaling approximately 10 percent of the Fund's net asset value.
The distributions are paid quarterly at a rate of 2.5 percent.
The Fund's multi-management investment approach and the payout policy
complement one another because when LAMCO finds it necessary to replace an
investment manager a portion of the portfolio is turned over (sold). This often
results in the realization of capital gains which provides a systematic
mechanism for distributing funds to shareholders, which are generally taxed at a
lower rate than ordinary income for most shareholders. This has helped to make
the Fund a more tax efficient investment for most shareholders.
All-Star has a diverse shareholder base. Some investors want a steady
stream of income with equity participation and choose to take their dividends in
the form of cash. Others choose to reinvest their dividends. Thus, in making its
distributions, the Fund is not liquidating 10 percent of its assets each year,
because many shareholders let their dividends compound over time by reinvesting.
7
MULTI-MANAGEMENT: WHAT AND WHY
A CONSISTENT APPROACH TO INVESTMENT MANAGEMENT SINCE 1986
"All-Star's portfolio is multi-managed, rather than single-managed, as are
almost all other mutual funds. Its assets are equally divided among five
portfolio management firms, each using a distinct, individualized style in
managing common stock portfolios. A successful portfolio management firm's style
is consistently employed through all types of stock market environments. Any one
style will result in better investment results in some markets than in others.
Thus, as ever-changing investors' preferences cause changes in stock market
leadership, one or more of All-Star's five different management styles are
expected to be in favor and the Fund as a whole will benefit. This same general
approach is used by most large pension funds in the United States, and is
intended to result in more consistent and less volatile investment performance
over changing market cycles than the use of the investment style of a single
manager."
- LIBERTY ALL-STAR EQUITY FUND'S FIRST ANNUAL REPORT (1986)
What was true 15 years ago remains equally true today. The preceding description
of All-Star's investment approach can be reprinted today, 15 years later,
without change. Today, as it did then, All-Star's Fund Manager, Liberty Asset
Management Company (LAMCO), utilizes multi-management instead of relying on a
single investment manager, as do most mutual funds. Since investment styles go
in and out of favor, a style that produces strong returns one year may produce
disappointing results the next. By contrast, multi-management combines managers
who practice different investment styles to reduce volatility while producing
attractive returns.
The Fund is structured as a core investment by combining both growth and
value style managers within the Fund. LAMCO doesn't ask an investment manager to
pick both growth and value stocks because that's an inefficient way to blend the
two styles. Instead, we believe that many good investment managers achieved
their success because they practice a specific style of investing and do so
because that's what they truly believe is the best way to make money.
All-Star's long-term track record provides clear testimony to the benefits
of the multi-management strategy. As the chart below illustrates, since
All-Star's first full calendar year of operation 15 years ago, the Fund has
achieved better-than-average returns and better-than-average consistency
compared with other open-end core funds.
[GRAPHIC]
All-Star's high return and high consistency combination is well-placed among
the universe of open-end Large-Cap Core funds
Each dot represents the precise 15-year return and consistency record ending
December 31, 2001, of one fund in the universe of 48 open-end Large-Cap Core
equity mutual funds (as classified by Lipper, Inc.) that have a 15-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.
8
HOW LAMCO PRACTICES MULTI-MANAGEMENT
[CHART]
TCW INVESTMENT MANAGEMENT COMPANY
GROWTH/Companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
OPPENHEIMER CAPITAL
VALUE/Companies that exhibit the ability to generate excess cash flow while
earning high returns on invested capital that trade below their intrinsic value.
WESTWOOD MANAGEMENT CORPORATION
VALUE/Companies selling at reasonable valuations based on the firm's earnings
projections, which are not yet reflected in consensus estimates.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
VALUE/Companies with low price-to-earnings and price-to-book ratios where a
catalyst for positive change has been identified.
MASTRAPASQUA & ASSOCIATES
GROWTH/Companies whose valuations do not reflect the potential for accelerated
earnings and cash flow growth.
LAMCO SELECTS AND BLENDS INVESTMENT MANAGERS FOR ALL-STAR, AND IT EVALUATES THEM
ON AN ONGOING BASIS, REPLACING THEM WHEN NECESSARY
The investment managers LAMCO selects for All-Star are distinguished by a number
of characteristics:
- A constant focus on a particular style of investing.
- A disciplined investment decision-making process.
- A record of success relative to other managers who practice the same strategy.
- Continuity among the investment professionals, so that those who have built
the record remain the managers.
- A well-managed, highly responsive organization.
The pie chart above shows the investment manager lineup and the allocations to
each, and is accompanied by a brief description of the managers' style.
LAMCO conducts continuing evaluation of the investment managers to be sure
that each is still the best choice for All-Star. Through frequent meetings with
the investment managers, and through other qualitative and quantitative
analyses, each is continually evaluated to assure that: they are consistently
practicing their investment style; their organization and investment process
continue to support their style; and their investment performance is competitive
when compared with other managers practicing a similar style.
LAMCO is also alert to ensuring the proficiency of the investment managers
as a team. The objective is to be certain that the team remains an optimal
combination, giving All-Star the full benefits of multi-management. Our
procedures include:
- Assuring that All-Star's total portfolio has the proper investment
characteristics.
- Researching new managers as possible future investment managers.
- Active rebalancing among investment managers.
- Making manager changes when necessary. Ten investment managers have been
replaced during the Fund's 15-year history.
9
MANAGER ROUNDTABLE
SIGNALS POINT TO RECOVERY AHEAD, BUT CAUTION LIGHTS ARE BLINKING TO REMIND
INVESTORS NOT TO GET AHEAD OF THEMSELVES; THE MANAGERS FOCUS ON COMPANY
FUNDAMENTALS
A YEAR AGO, stock market indices had closed out a down year, the Fed was cutting
interest rates, the Bush/Gore election had been resolved, "new economy" dreams
had been replaced by old economy realities and it seemed as though markets were
poised for a steady, if unspectacular year. But, events don't always go as
scripted, and stocks gave up ground again in 2001 as investors focused on weak
corporate earnings, valuations that remained high by historical standards, a
slowing economy and a host of lesser problems - and that was before September
11. What are the chances of a third straight negative year? All-Star's managers
focus on stockpicking, not market forecasting, so there's no attempt to answer
that question here. But - as this Manager Roundtable shows - their differing
styles lead them to differing perspectives on 2002.
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGERS' VIEWS AT THE TIME
OF THE DISCUSSION (JANUARY 2002) AND ARE SUBJECT TO CHANGE.
For our 2001 Annual Report Roundtable, All-Star's five investment managers share
their views on a number of topics, from a look back at 2001 to a look ahead at
how their individual styles will drive investment decisions in 2002. While 2001
was a challenging year for Liberty All-Star Equity Fund - as it was for most
equity investors - the Fund's shares valued at market price managed to close the
year exactly where they began it. This was a notable achievement, as most growth
and value indices declined. The Fund Manager, Liberty Asset Management Company
(LAMCO), serves as moderator for the Roundtable. The participating portfolio
managers and their investment styles are:
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
PORTFOLIO MANAGER/Mark E. Donovan,
Chairman, Equity Strategy Committee
INVESTMENT STYLE/Value - Boston Partners invests in undervalued companies that
have sound business fundamentals and positive business momentum. The firm
searches for companies with low price-to-earnings and price-to-book value ratios
where a catalyst for positive change has been identified.
MASTRAPASQUA & ASSOCIATES
PORTFOLIO MANAGER/Frank Mastrapasqua,
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 ratio is computed and compared to an independently derived
long-term earnings growth rate. Companies selected for investment have projected
growth rates that exceed the risk-adjusted price-to-earnings ratio.
OPPENHEIMER CAPITAL
PORTFOLIO MANAGER/ John G. Lindenthal,
Managing Director
INVESTMENT STYLE/Value - Oppenheimer invests in the stocks of quality companies
with sound business prospects that are considered undervalued. Research focuses
on cash flow analysis. Purchase candidates exhibit a high return on equity,
large undedicated cash flow and reasonable prices in relation to intrinsic
value.
TCW INVESTMENT MANAGEMENT COMPANY
PORTFOLIO MANAGER/Glen E. Bickerstaff,
Managing Director U.S. Equities
INVESTMENT STYLE/Growth - TCW invests in companies that have superior sales
growth, leading and/or rising market shares, and high and/or rising profit
margins. Its concentrated growth equity strategy seeks leading companies with
distinct advantages in their business model and an inherent edge over their
competitors. Research plays a critical role in the selection process, and the
investment horizon is long term.
WESTWOOD MANAGEMENT CORPORATION
PORTFOLIO MANAGER/Susan M. Byrne,
President and Chief Investment Officer
INVESTMENT STYLE/Value - Westwood employs internally-generated, bottom-up,
fundamental research and seeks to identify stocks with misperceived growth
expectations. Proprietary income and balance sheet projections are utilized to
identify securities whose typical portfolio
[SIDENOTE]
"P/E RATIOS MAY APPEAR HIGH FROM A HISTORICAL PERSPECTIVE, BUT RELATIVE TO
INTEREST RATES AND, PERHAPS MORE IMPORTANTLY, RELATIVE TO INFLATION - BOTH OF
WHICH ARE QUITE LOW - VALUATIONS ARE REASONABLE."
GLEN BICKERSTAFF,
TCW (GROWTH)
10
characteristics include higher return on equity, higher forecasted 12-month
growth rates and lower forecasted price-to-earnings ratios than the market.
LAMCO: Looking back, what is the one thing that surprised you most about the
financial markets in 2001? John Lindenthal, lead off for us, please.
LINDENTHAL (OPPENHEIMER - VALUE): The biggest surprise in terms of the
investment overview was the extent of the decline in short-term interest rates
due to Fed easing and weakness in the economy. In terms of individual stocks,
the collapse of Enron happened very fast.
LAMCO: How about the other value managers' perspectives, Susan Byrne and Mark
Donovan?
BYRNE (WESTWOOD - VALUE): Beyond the shock and pain of September 11, we think
the collapse of Enron would be the biggest surprise. I thought the lessons over
leverage had been learned in 1998 with the demise of Long-Term Capital
Management. Usually, these are generation-defining events, but with this one-two
punch, the market's focus on the balance sheet should prove to be a strict
disciplinarian.
DONOVAN (BOSTON PARTNERS - VALUE): We were surprised by the strength of the
fourth quarter recovery in stock prices, and particularly surprised at
investors' willingness to move back into NASDAQ stocks. While the sharp initial
sell-off of stocks immediately after the September 11 attacks was clearly an
emotional reaction and bound to be followed by a bounce back, we found it
surprising that the rise persisted through year-end. In our judgment, corporate
America still faces a challenging profit environment in the quarters ahead, even
if we have now passed through the trough of the recession. These challenges are
particularly evident for many NASDAQ companies, some of which have seen 50
percent or greater increases in their share prices off of their September lows.
LAMCO: What about the growth managers? What surprised you, Frank Mastrapasqua
and Glen Bickerstaff?
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): We were most surprised by the
speed with which the financial markets were able to recover from the devastation
to infrastructure and life that occurred on September 11. Despite losses to a
single firm which provided 25 percent of fixed income market liquidity, two days
later the market was trading in an orderly manner. The equity markets, being
closed for four days, functioned efficiently when reopened with virtually no
disruptions.
BICKERSTAFF (TCW - GROWTH): We do not try to forecast the markets. Rather, we
spend our time focusing on companies that possess significant business model
advantage and that, over time, will be able to gain share and create wealth for
shareholders. Nevertheless, we were surprised by the dramatic sell-off in the
market in 2001 and the abrupt slowdown in capital spending.
LAMCO: After a look back at 2001, let's turn our focus to 2002. Persuasive
arguments can be made, pro and con, for the stock market outlook (e.g., pro: Fed
interest rate cuts, rebound in the economy; con: high P/E ratios, global
recession, further terrorist attacks). What factors, bottom-up or top-down, are
you focusing on to drive investment decisions in 2002? Glen Bickerstaff, let's
stay with you.
BICKERSTAFF (TCW - GROWTH): From a top-down standpoint we try to identify
long-term themes that specific companies can benefit from. We have witnessed a
significant lowering of interest rates after what were perhaps unnecessary
increases in 1999 and 2000. The war on terrorism has gone well. The global
synchronized recession may turn into a global synchronized recovery.
Price-to-earnings (P/E) ratios may appear high from a historical perspective,
but relative to interest rates and, perhaps more importantly, relative to
inflation - both of which are quite low - valuations are reasonable. Besides, as
companies have come through a profits recession the earnings of current
price-to-earnings (P/E) ratios are a bit depressed. If the economy does recover,
then forecast earnings - especially relative to down cycle results, where
companies were willing to take writedowns - may exceed consensus expectations.
LAMCO: Frank Mastrapasqua, what are you focusing on to drive investment
decisions?
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): We're anticipating further
liquidity growth, lower energy prices, inventory liquidation, fiscal stimulus
and the geopolitical realignment to be key developments.
[SIDENOTE]
"IF A PROFIT RECOVERY FAILS TO MATERIALIZE, WE SUSPECT THERE WILL BE A GROWING
CONCERN THAT THE AGGRESSIVE MONETARY EASING...HAS NOT WORKED AND THE FED IS
`PUSHING ON A STRING...'"
MARK DONOVAN,
BOSTON PARTNERS (VALUE)
11
Earnings are likely to surprise on the upside, led by recovery in technology,
health care, financial services, transportation and business service sectors.
LAMCO: Susan Byrne, how about Westwood Management's focus for 2002?
BYRNE (WESTWOOD - VALUE): Westwood believes the fundamentals are in place for
economic growth and a rebound in corporate earnings. The existing monetary and
fiscal stimulus will lead to an economic recovery in the first half of 2002, and
the economy should grow steadily in the second half of the year, but at a level
below its historical trend as consumer spending remains muted. Corporate profits
will post a sharper rebound next year as cost cutting and headcount reductions
set the stage for strong earnings growth, driven by a moderate improvement in
sales growth. Benign inflation will be supportive to equity valuations.
LAMCO: What is Boston Partners focused on, Mark Donovan?
DONOVAN (BOSTON PARTNERS - VALUE): We are primarily focused on the trend in
corporate profits. Most of the published estimates for 2002 suggest that
operating earnings for the S&P 500 will come in around $49.00, representing a
13% increase over estimated 2001 operating earnings. We believe there are a
number of factors that may make it difficult for companies to meet their profit
expectations. These include overcapacity in the industrial and technology
sectors, a financially strapped consumer, and an expected rise in the costs
associated with corporate defined benefit pension plans. With the S&P now
trading at about 23 times forecasted profits, we don't see a tremendous margin
of safety to protect investors against disappointments in earnings for the year
ahead.
LAMCO: John Lindenthal, what are you concentrating on at Oppenheimer?
LINDENTHAL (OPPENHEIMER - VALUE): Future events that are top-down in relation to
interest rates, the economy and global recession are almost impossible to
predict. We focus on individual stock selection, where the opportunity to
generate positive returns outweighs the risk of ownership. Overall valuations
remain high, so we are focused on finding value in individual securities. We
continue to have an over weighting in financial stocks.
LAMCO: Turning to another thought about 2002, what, in your opinion, is the
biggest risk factor or source of disappointment that might diminish returns in
2002, and what is the biggest potential positive surprise that might take the
market higher? Let's ask the growth managers to start off.
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): The biggest risk factor is
the possibility that a premature shift from an aggressive monetary policy stalls
the prospect for a multi-year cyclical rebound. The most likely upside surprise
would be strong productivity, thus raising earnings and cash flow to unexpected
levels.
BICKERSTAFF (TCW - GROWTH): The historically high level of mortgage refinancing
has probably run its course. At the margin, the consumer's financial situation
cannot get significantly better. So, one should not expect a powerful,
consumer-led recovery. However, after a significant hiatus, corporate America
should be ready to resume investing capital in equipment that will enable
companies to compete in a globally competitive world. Today's technology
products offer greater improvements and enhancements for the dollar invested
than at any similar point in a period of economic decline. The fact that
companies have been able to improve productivity during a recession, when they
were mostly overstaffed, affirms the notion that spending for information
technology equipment has made business much more efficient. Moreover, as
technology product prices have fallen during the recession the value proposition
to business has become quite compelling.
LAMCO: OK, let's turn to the value perspective. Start us off, Mark Donovan.
DONOVAN (BOSTON PARTNERS - VALUE): As I noted earlier, the market seems to have
embraced a scenario whereby profits enjoy a robust, "v-shaped" recovery in 2002.
We cited some of the reasons why we are cautious on the profit recovery this
year. A further risk factor is a loss of confidence on the part of investors. If
a profit recovery fails to materialize, we suspect there will be a growing
concern that the aggressive monetary easing undertaken by the Federal Reserve
throughout 2001 has not worked and the Fed is "pushing on a string" in trying to
revive the economy. Such a loss of confidence would likely manifest itself in
declining equity market valuations.
[SIDENOTE]
"OVERALL VALUATIONS REMAIN HIGH, SO WE ARE FOCUSED ON FINDING VALUE IN
INDIVIDUAL SECURITIES. WE CONTINUE TO HAVE AN OVER WEIGHTING IN FINANCIAL
STOCKS."
JOHN LINDENTHAL,
OPPENHEIMER (VALUE)
12
The positive scenario for the market would be if the anticipated profit
recovery becomes more evident in the early part of 2002, as opposed to the
consensus view of a late-year recovery in earnings. This would set the stage for
companies to potentially exceed consensus expectations for profits.
LINDENTHAL (OPPENHEIMER - VALUE): The biggest risk factor is a lack of an
earnings rebound in sectors such as technology and telecommunications where
earnings have been particularly hard hit over the past year. On the positive
side, continued low inflation, interest rates and excess liquidity provided by
the Federal Reserve would certainly help the market's direction.
BYRNE (WESTWOOD - VALUE): The potential problems in 2002 include still-high
valuations, especially in many technology groups. The depressed economic
condition in Japan and Argentina could spread to their neighbors. This would
threaten the U.S. and European recoveries. The possibility for a dollar crisis
due to overly rapid portfolio adjustments to the euro is a slight, but serious,
possibility. The most positive potential surprise could be strong profits,
modest economic activity and low inflation - the perfect recipe for a good stock
market.
LAMCO: Industries and/or sectors have received a lot of attention lately, also
pro and con. For instance, a stalwart like pharmaceuticals has been under
pressure and the outlook for technology/telecom remains muted; consumer
discretionary and housing have been strong. What is your own outlook for
industries/sectors that are likely to lead the market and, conversely, those
that are likely to lag? Let's hear first from the value managers on this one.
What are your thoughts, Mark Donovan?
DONOVAN (BOSTON PARTNERS - VALUE): As we enter 2002, we don't believe there are
any sectors of the market that stand out as being exceptionally undervalued or
overvalued. A sector that is beginning to emerge as a potentially interesting
investment opportunity is the energy sector. We are intrigued with this group
for the simple reason that capital spending appears to have peaked in mid-2001
and is now on the decline. In any commodity business, declining expenditures
tend to be a good first indicator to look for as a precursor to an upturn in the
pricing cycle. Our enthusiasm for the group is tempered somewhat by the high
level of inventories in both crude oil and natural gas that currently exist, as
well as an uncertain near-term outlook for OPEC compliance with recently reduced
production schedules.
LAMCO: What is Westwood's strategy vis-a-vis sectors, Susan Byrne?
BYRNE (WESTWOOD - VALUE): Westwood has positioned the portfolio with a barbell
structure. On one end of the barbell, we are focused on cyclical companies that
stand to benefit from the sooner-than-expected economic recovery. This is
reflected in Westwood's positions in the basic materials, producer durables and
energy sectors as well as our ownership of select technology stocks. On the
other end of the barbell, we are focused on companies that offer attractive
dividend yields. With money market rates at very low levels, total
return-oriented investors may increasingly look to high yielding equities in the
financial, utility and real estate investment trust sectors.
LAMCO: John Lindenthal, what is Oppenheimer's perspective?
LINDENTHAL (OPPENHEIMER - VALUE): Overall valuation levels have narrowed for
both economic sectors and investment styles. The trade-off between value and
growth over the past two years has run its course. The aggressive group rotation
within sectors has evened out the valuation spread among groups. So again, we
focus on individual stocks that are mispriced by investors where we have an
insight on what will improve the company's operations.
LAMCO: Glen Bickerstaff, what is TCW's position regarding sectors?
BICKERSTAFF (TCW - GROWTH): As I mentioned earlier, we anticipate a resumption
in spending for information technology products. The portfolio is well
positioned with leading companies, like Dell, Microsoft, Maxim Integrated and
Siebel, which will benefit from this development. Additionally, we continue to
anticipate strong long-term demand for health care and financial services.
Companies like Genentech and Charles Schwab have very compelling franchises. We
do not believe in the sector rotation game. Everyone has access to the same
macro information and, typically, whatever appears to be a sure thing is not.
[SIDENOTE]
"WESTWOOD BELIEVES THE FUNDAMENTALS ARE IN PLACE FOR ECONOMIC GROWTH AND A
REBOUND IN CORPORATE EARNINGS. BENIGN INFLATION WILL BE SUPPORTIVE TO EQUITY
VALUATIONS."
SUSAN BYRNE,
WESTWOOD MANAGEMENT (VALUE)
13
LAMCO: Frank Mastrapasqua, what are your expectations for leading and lagging
sectors?
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): Consumer spending should
remain strong and capital expenditures should return to more normal levels. In
the early stages of the upturn, traditional cyclical sectors should recover
effectively, complementing an anticipated upturn in traditional growth
industries. The laggards will be more pronounced in those companies that have
failed to modernize during the downturn, compromised on R&D, or where directors
have become complacent with mediocre management that lacks vision and effective
execution.
LAMCO: This has been an interesting discussion. Let's focus on one more
question: Since interest rates aren't likely to go much lower - and the economy,
based on many forecasts, should be strong enough to turn in a good second half
in 2002 - how much risk do you see if the Fed reverses course and begins to
increase rates? Susan Byrne, thoughts, please?
BYRNE (WESTWOOD - VALUE): The degree of risk to the equity markets associated
with an increase in official interest rates is dependent upon the conditions
that lead to any rate increase. Because the real fed funds rate tends to track
changes in real GDP, if the Fed raises the fed funds rate in response to higher
real economic growth, then the impact on equity prices in general should be
minimal. However, if an increase in the fed funds rate is in response to higher
inflation, then the implications for the equity markets are more significant and
a negative impact on equity prices would be expected.
LAMCO: Thank you. Mark Donovan, what are your thoughts about interest rates?
DONOVAN (BOSTON PARTNERS - VALUE): Interestingly, the interest rate futures
markets are discounting a very high probability that the Fed will be in a
tightening mode by the second half of this year, yet the equity markets seem to
be putting a very low probability on this scenario judging from the market's P/E
multiple of roughly 23 times. We would, therefore, conclude that the equity
market does face the risk of a decline in its P/E ratio should the Fed begin to
increase interest rates.
LAMCO: John Lindenthal, what is Oppenheimer's position on interest rates?
LINDENTHAL (OPPENHEIMER - VALUE): The risk of higher interest rates at some
point could be substantial because price-to-earnings ratios are still high.
Bonds would become more competitive with stocks and the Fed would be draining
liquidity from the financial system, which is usually not good for equities.
However, we do not foresee higher rates in the near term because of excess
capacity, lower energy prices and restrained investment by corporations.
LAMCO: Let's wrap-up with the growth managers' point of view on interest rates.
Glen Bickerstaff, share your thinking, please, and then let's hear from Frank
Mastrapasqua.
BICKERSTAFF (TCW - GROWTH): We believe the Fed's primary role is to fight
inflation. Inflation rates are very low and the long-term structural forces of
inflation are very benign. So, in our view, there is no reason today for the Fed
to raise rates. We do not anticipate that inflation or economic growth will be
problematic for the foreseeable future and, thus, there would be no reason for
the Fed to raise rates. We do not anticipate much benefit from further rate
reductions, either. If one needs to borrow money, one would willingly pay more
than prevailing rates. Alternatively, if one were nervous about their ability to
repay a loan no rate short of zero would entice borrowing. If the Fed is unable
to stimulate demand through further rate cuts, we have probably seen the end of
the mortgage-refinancing boom. Washington seems unable to bring about a fiscal
stimulus package but the economy may recover without it.
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): I believe the impact would be
significant. Should the Fed reverse interest rate policy, we would argue that
the economic upturn would be stymied and severely limit the magnitude and
duration of the market upturn.
LAMCO: Many thanks to all for an interesting session.
[SIDENOTE]
"EARNINGS ARE LIKELY TO SURPRISE ON THE UPSIDE, LED BY RECOVERY IN TECHNOLOGY,
HEALTH CARE, FINANCIAL SERVICES, TRANSPORTATION AND BUSINESS SERVICE SECTORS."
FRANK MASTRAPASQUA,
MASTRAPASQUA & ASSOCIATES (GROWTH)
14
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S FIVE INVESTMENT MANAGERS AND THE INVESTMENT STYLES THEY
PRACTICE ARE:
BOSTON PARTNERS ASSET MANAGEMENT, L.P./VALUE
Companies with low price-to-earnings and price-to-book ratios where a catalyst
for positive change has been identified.
OPPENHEIMER CAPITAL/VALUE
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital that trade below their intrinsic value.
WESTWOOD MANAGEMENT CORPORATION/VALUE
Companies selling at reasonable valuations based on the firm's earnings
projections, which are not yet reflected in consensus estimates.
MASTRAPASQUA & ASSOCIATES/GROWTH
Companies whose valuations do not reflect the potential for accelerated earnings
and cash flow growth.
TCW INVESTMENT MANAGEMENT COMPANY/GROWTH
Companies that have superior sales growth, leading and/or rising market shares,
and high and/or rising profit margins.
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN PORTFOLIO
CHARACTERISTICS:
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of a
multi-managed portfolio. The characteristics are different for each of the
Fund's five investment managers. These differences are a reflection of the fact
that each pursues a different investment style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Stock Index.
PORTFOLIO CHARACTERISTICS INVESTMENT STYLE SPECTRUM
AS OF DECEMBER 31, 2001 VALUE GROWTH
(UNAUDITED) [GRAPHIC]
BOSTON OPPEN- MASTRA- TOTAL S&P
PARTNERS HEIMER WESTWOOD PASQUA TCW FUND 500 INDEX
------------------------------------------------------------------------------------------------------------------------------------
Number of Holdings 42 28 40 37 26 143 500
Percent of Holdings in Top 10 38% 56% 28% 37% 57% 19% 25%
Weighted Average Market
Capitalization (billions) $27 $67 $51 $83 $82 $61 $105
Average Five-Year
Earnings Per Share Growth 11% 17% 12% 22% 29% 18% 16%
Dividend Yield 1.3% 1.5% 2.1% 0.3% 0.2% 1.1% 1.4%
Price/Earnings Ratio 15x 17x 16x 35x 38x 23X 24x
Price/Book Value Ratio 2.8x 3.6x 2.9x 7.0x 7.1x 4.6X 5.3x
15
INVESTMENT GROWTH AS OF DECEMBER 31, 2001
[EDGAR REPRESENTATION OF MOUNTAIN CHART]
NAV MARKET PRICE
DIVIDENDS DIVIDENDS
NAV REINVESTED REINVESTED
----- ---------- ----------
30-Oct-86 9.3 9.3 9.3
30-Nov-86 9.42 9.42 9.42
31-Dec-86 9.11 9.11 9.11
31-Jan-87 10.17 10.17 10.17
28-Feb-87 10.87 10.87 10.87
31-Mar-87 11.08 11.09 11.09
30-Apr-87 10.77 10.77 10.77
31-May-87 10.86 10.86 10.86
30-Jun-87 11.31 11.32 11.32
31-Jul-87 11.81 11.82 11.82
31-Aug-87 12.28 12.39 12.39
30-Sep-87 11.8 11.94 11.94
31-Oct-87 9.24 9.12 9.12
30-Nov-87 8.51 8.32 8.32
31-Dec-87 9.08 9.01 9.01
31-Jan-88 9.47 9.45 9.45
29-Feb-88 9.82 9.85 9.85
31-Mar-88 9.51 9.51 9.51
30-Apr-88 9.52 9.52 9.52
31-May-88 9.48 9.47 9.47
30-Jun-88 9.85 9.95 9.95
31-Jul-88 9.75 9.83 9.83
31-Aug-88 9.54 9.58 9.58
30-Sep-88 9.9 10.05 10.05
31-Oct-88 10.05 10.23 10.23
30-Nov-88 9.92 10.08 10.08
31-Dec-88 10.11 10.33 10.33
31-Jan-89 10.65 11.01 11.01
28-Feb-89 10.49 10.81 10.81
31-Mar-89 10.64 11.04 11.04
30-Apr-89 11.05 11.56 11.56
31-May-89 11.44 12.07 12.07
30-Jun-89 11.35 11.99 11.99
31-Jul-89 12.09 12.98 12.98
31-Aug-89 12.31 13.26 13.26
30-Sep-89 12.35 13.38 13.38
31-Oct-89 12.14 13.09 13.09
30-Nov-89 12.25 13.25 13.25
31-Dec-89 12.35 13.44 13.44
31-Jan-90 11.79 12.66 12.66
28-Feb-90 11.88 12.78 12.78
31-Mar-90 12.13 13.18 13.18
30-Apr-90 11.99 12.98 12.98
31-May-90 12.91 14.3 14.3
30-Jun-90 12.96 14.42 14.42
31-Jul-90 12.93 14.38 14.38
31-Aug-90 12.15 13.22 13.22
30-Sep-90 11.69 12.58 12.58
31-Oct-90 11.67 12.55 12.55
30-Nov-90 12.23 13.41 13.41
31-Dec-90 12.59 14 14
31-Jan-91 13.04 14.71 14.71
28-Feb-91 13.71 15.76 15.76
31-Mar-91 14.1 16.41 16.41
30-Apr-91 14.03 16.3 16.3
31-May-91 14.54 17.12 17.12
30-Jun-91 14.04 16.32 16.32
31-Jul-91 14.52 17.12 17.12
31-Aug-91 14.56 17.19 17.19
30-Sep-91 14.76 17.54 17.54
31-Oct-91 14.95 17.86 17.86
30-Nov-91 14.35 16.84 16.84
31-Dec-91 15.89 19.5 19.5
31-Jan-92 15.69 19.15 19.15
29-Feb-92 15.46 18.75 18.75
31-Mar-92 15.52 18.86 18.86
30-Apr-92 15.62 19.04 20.95
31-May-92 15.72 19.22 21.14
30-Jun-92 15.47 18.76 20.64
31-Jul-92 15.92 19.58 21.55
31-Aug-92 15.44 18.7 20.58
30-Sep-92 15.94 19.63 21.6
31-Oct-92 16.04 19.81 21.81
30-Nov-92 16.17 20.06 22.08
31-Dec-92 16.54 20.75 22.84
31-Jan-93 16.62 20.91 23.01
28-Feb-93 16.46 20.6 22.67
31-Mar-93 16.78 21.22 23.36
30-Apr-93 16.45 20.57 22.64
31-May-93 16.55 20.77 22.86
30-Jun-93 16.85 21.36 23.52
31-Jul-93 16.83 21.32 23.47
31-Aug-93 17.02 21.71 23.9
30-Sep-93 17.35 22.38 24.64
31-Oct-93 17.4 22.48 26.25
30-Nov-93 17.17 21.99 25.68
31-Dec-93 17.41 22.47 26.24
31-Jan-94 17.78 23.27 27.17
28-Feb-94 17.35 22.34 26.09
31-Mar-94 17.12 21.82 25.47
30-Apr-94 17.2 21.99 25.68
31-May-94 17.07 21.71 25.34
30-Jun-94 17 21.52 25.12
31-Jul-94 17.3 22.2 25.92
31-Aug-94 17.76 23.27 27.16
30-Sep-94 17.46 22.57 27.85
31-Oct-94 17.63 22.96 28.34
30-Nov-94 16.94 21.36 26.35
31-Dec-94 17.27 22.18 27.36
31-Jan-95 17.41 22.51 27.78
28-Feb-95 17.5 22.73 28.04
31-Mar-95 18.08 24.12 29.77
30-Apr-95 18.23 24.49 30.22
31-May-95 18.38 24.86 30.67
30-Jun-95 19.03 26.47 32.66
31-Jul-95 19.45 27.53 33.97
31-Aug-95 19.24 27 33.32
30-Sep-95 19.82 28.51 35.17
31-Oct-95 19.7 28.2 34.79
30-Nov-95 19.81 28.48 35.14
31-Dec-95 20.08 29.19 36.01
31-Jan-96 20.44 30.14 37.19
29-Feb-96 20.62 30.61 37.78
31-Mar-96 20.76 30.98 38.23
30-Apr-96 20.99 31.61 39
31-May-96 20.96 31.53 38.9
30-Jun-96 21.17 32.15 39.67
31-Jul-96 20.52 30.33 37.44
31-Aug-96 20.62 30.61 37.78
30-Sep-96 21.63 33.48 41.31
31-Oct-96 21.8 33.96 41.91
30-Nov-96 22.58 36.28 44.78
31-Dec-96 22.31 35.52 43.83
31-Jan-97 23.01 37.6 46.4
28-Feb-97 22.91 37.3 46.03
31-Mar-97 22.41 35.79 44.16
30-Apr-97 22.87 37.19 45.9
31-May-97 23.45 38.96 48.08
30-Jun-97 24.31 41.62 51.36
31-Jul-97 25.29 44.68 55.15
31-Aug-97 24.34 41.71 51.48
30-Sep-97 25.36 44.92 55.44
31-Oct-97 24.86 43.31 53.46
30-Nov-97 25.21 44.45 54.88
31-Dec-97 25.37 44.98 55.53
31-Jan-98 25.35 44.91 55.45
28-Feb-98 26.45 48.63 60.03
31-Mar-98 27.2 51.19 63.21
30-Apr-98 27.33 51.64 63.77
31-May-98 26.45 48.6 62.44
30-Jun-98 27.19 51.29 65.88
31-Jul-98 26.89 50.22 64.51
31-Aug-98 24.23 40.76 52.36
30-Sep-98 25.37 44.88 57.65
31-Oct-98 26.21 47.96 61.6
30-Nov-98 26.5 49.02 62.96
31-Dec-98 27.67 53.47 68.67
31-Jan-99 27.72 53.66 68.91
28-Feb-99 27.24 51.85 66.59
31-Mar-99 27.75 53.86 69.17
30-Apr-99 28.56 56.98 73.19
31-May-99 27.96 54.67 70.21
30-Jun-99 28.88 58.38 74.98
31-Jul-99 28.27 55.96 71.88
31-Aug-99 27.48 52.83 67.85
30-Sep-99 27.48 52.91 67.95
31-Oct-99 28.14 55.6 71.41
30-Nov-99 27.92 54.7 70.25
31-Dec-99 28.86 58.93 75.68
31-Jan-00 28.39 56.95 73.14
29-Feb-00 28.26 56.4 72.44
31-Mar-00 29.65 62.65 80.47
30-Apr-00 29.48 61.92 79.52
31-May-00 29.22 60.79 78.08
30-Jun-00 29.62 62.71 80.54
31-Jul-00 29.51 62.22 79.91
31-Aug-00 30.12 64.94 83.4
30-Sep-00 30.15 65.25 83.8
31-Oct-00 30.33 66.07 84.86
30-Nov-00 28.89 59.48 76.39
31-Dec-00 29.87 64.1 82.33
31-Jan-01 30.03 64.86 83.29
28-Feb-01 28.93 59.74 76.72
31-Mar-01 28.09 55.67 71.5
30-Apr-01 28.99 60.03 77.09
31-May-01 29.09 60.5 77.7
30-Jun-01 28.88 59.46 76.36
31-Jul-01 28.6 58.07 74.58
31-Aug-01 27.9 54.89 70.5
30-Sep-01 26.7 48.73 62.59
31-Oct-01 27.08 50.68 65.09
30-Nov-01 27.97 55.25 70.96
31-Dec-01 28.11 55.99 71.91
INCLUDES ADDITIONAL INVESTMENTS
MADE THROUGH RIGHTS OFFERINGS $71.91(2)
NET ASSET VALUE OF SHARES ACQUIRED
THROUGH DISTRIBUTION REINVESTMENT $55.99(2)
NET ASSET VALUE PER SHARE
PLUS DISTRIBUTIONS PAID $28.11(1)
1. Net asset value (NAV) of one share of All-Star as of 12/31/01 plus
distributions paid since inception.
2. To evaluate your investment in the Fund, these values should be used. Each
value shows how your investment valued at NAV has fared by reinvesting the
Fund's distributions. The upper value includes additional investments made
through the rights offerings in 1992, 1993, 1994 and 1998.
The above chart illustrates the net asset value (NAV) growth of an original
share of the Fund since the Fund's inception date through December 31, 2001. The
bottom region of the chart reflects NAV growth assuming all distributions were
received in cash and not reinvested back into the Fund. An original share grew
to $28.11 (current NAV of $10.65 plus distributions paid since inception
totaling $17.46, which includes tax credits of $0.67 on retained capital gains).
Moving up the chart, the middle region depicts additional value added
through the reinvestment and compounding of distributions. An original share
with distributions reinvested grew to $55.99 (5.257 shares times the current NAV
of $10.65).
On four occasions, the Fund has allowed the purchase of additional shares of
the Fund at a discount through rights offerings. The top region illustrates the
additional value added assuming participation in all the rights offerings and
the reinvestment of all distributions. An original share grew to $71.91 (6.752
shares times the current NAV of $10.65).
16
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENTS
SHARES SHARES
SHARES PURCHASED ACQUIRED SHARES NAV(1) MARKET PRICE TOTAL MARKET
OWNED AT THROUGH THROUGH OWNED PER SHARE TOTAL NAV PER SHARE PRICE OF
BEGINNING PER SHARE REINVESTMENT RIGHTS AT END AT END OF SHARES AT END SHARES
YEAR OF YEAR DISTRIBUTIONS PROGRAM OFFERING OF YEAR OF YEAR OWNED OF YEAR OWNED
1987 1.000 $1.18 0.140 - 1.140 $7.90 $9.01 $6.00 $6.84
1988 1.140 0.64 0.107 - 1.247 8.29 10.34 7.25 9.04
1989 1.247 0.95 0.156 - 1.403 9.58 13.44 8.25 11.57
1990 1.403 0.90 0.167 - 1.570 8.92 14.00 7.75 12.17
1991 1.570 1.02 0.171 - 1.741 11.20 19.50 10.75 18.72
1992 1.741 1.07 0.199 0.179(2) 2.119 10.78 22.84 11.125 23.57
1993 2.119 1.25(3) 0.266 0.138(2) 2.523 10.40 26.24 11.125 28.07
1994 2.523 1.00 0.277 0.155(2) 2.955 9.26 27.36 8.50 25.12
1995 2.955 1.04 0.310 - 3.265 11.03 36.01 10.875 35.51
1996 3.265 1.31(3) 0.403 - 3.668 11.95 43.83 11.25 41.27
1997 3.668 1.69(3) 0.501 - 4.169 13.32 55.53 13.313 55.50
1998 4.169 1.40 0.487 0.173(2) 4.829 14.22 68.67 12.938 62.48
1999 4.829 1.39 0.569 - 5.398 14.02 75.68 11.063 59.72
2000 5.398 1.42 0.651 - 6.049 13.61 82.33 12.375 74.86
2001 6.049 1.20 0.703 - 6.752 10.65 71.91 11.09 74.88
1. Net Asset Value.
2. 1992: Rights offering completed in April 1992. One share offered at $10.05
for every 10 shares owned.
1993: Rights offering completed in October 1993. One share offered at $10.41
for every 15 shares owned.
1994: Rights offering completed in September 1994. One share offered at $9.14
for every 15 shares owned.
1998: Rights offering completed in April 1998. One share offered at $12.83
for every 20 shares owned.
3. 1993: Includes the $0.18 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$11.125.
1996: Includes the $0.13 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$11.25.
1997: Includes the $0.36 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$13.313.
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its common shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES. If, for any calendar year, the total distributions
required by the 10 percent pay-out policy exceed the Fund's net investment
income and net realized capital gains, the excess will generally be treated as a
tax-free return of capital, reducing the shareholder's adjusted basis in his or
her shares. If the Fund's net investment income and net realized capital gains
for any year exceed the minimum amount required to be distributed under the 10
percent pay-out policy, the Fund may, in its discretion, retain and not
distribute net realized capital gains and pay income tax thereon to the extent
of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.
17
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 12/31/01 OF 9/30/01 SECURITY NAME VALUE ($000) NET ASSETS
----------------------------------------------------------------------------------------------------------------------------------
1 1 Freddie Mac $32,399 2.9%
2 2 Citigroup, Inc. 31,387 2.8
3 3 The Progressive Corp. 25,918 2.3
4 6 Microsoft Corp. 22,895 2.0
5 14 Dell Computer Corp. 17,931 1.6
6 5 Sprint Corp. (FON Group) 15,721 1.4
7 13 Genentech, Inc. 15,478 1.4
8 7 Amgen, Inc. 15,470 1.4
9 11 Wal-Mart Stores, Inc. 14,819 1.3
10 8 Countrywide Credit Industries, Inc. 14,688 1.3
11 17 The Home Depot, Inc. 13,933 1.2
12 4 XL Capital Ltd. 13,896 1.2
13 18 International Business Machines Corp. 13,808 1.2
14 29 Clear Channel Communications, Inc. 13,664 1.2
15 31 Maxim Integrated Products, Inc. 13,227 1.2
16 15 American International Group, Inc. 13,165 1.2
17 27 Applied Materials, Inc. 13,101 1.2
18 65 Tyco International Ltd. 12,658 1.1
19 19 Intel Corp. 12,479 1.1
20 20 Marathon Oil Corp. 12,444 1.1
21 59 ChevronTexaco Corp.* 12,375 1.1
22 24 General Electric Co. 11,090 1.0
23 26 Alcoa, Inc. 11,013 1.0
24 12 Pfizer, Inc. 10,832 1.0
25 95 Siebel Systems, Inc. 10,767 1.0
26 23 McDonald's Corp. 10,556 0.9
27 25 American Home Products Corp. 10,542 0.9
28 28 Verizon Communications, Inc. 10,491 0.9
29 34 QUALCOMM, Inc. 10,342 0.9
30 82 Conoco, Inc. 10,321 0.9
31 58 Agilent Technologies, Inc. 10,229 0.9
32 40 IDEC Pharmaceuticals Corp. 10,064 0.9
33 39 Hewlett-Packard Co. 9,952 0.9
34 47 Cisco Systems, Inc. 9,723 0.9
35 36 The Gillette Co. 9,562 0.8
36 73 3Com Corp. 9,158 0.8
37 130 Network Appliance, Inc. 9,135 0.8
38 49 Stilwell Financial, Inc. 9,111 0.8
39 10 Pharmacia Corp. 8,829 0.8
40 30 Wells Fargo & Co. 8,690 0.8
41 22 AFLAC, Inc. 8,596 0.8
42 21 UST, Inc. 8,411 0.7
43 43 Biovail Corp. 8,325 0.7
44 86 Xilinx, Inc. 8,279 0.7
45 53 Genzyme Corp. 8,261 0.7
46 61 Golden West Financial Corp. 8,139 0.7
47 New Transocean Sedco Forex, Inc. 8,100 0.7
48 35 FleetBoston Financial Corp. 8,030 0.7
49 45 The Boeing Co. 7,756 0.7
50 38 Minnesota Mining & Manufacturing Co. 7,684 0.7
*Result of merger between Chevron Corp. and Texaco, Inc.
18
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 2001.
SECURITY NAME PURCHASES (SALES) SHARES AS OF 12/31/01
-----------------------------------------------------------------------------------------------------------------------
PURCHASES
ConAgra Foods, Inc. 239,100 239,100
Dominion Resources, Inc. 99,000 99,000
FedEx Corp. 100,000 100,000
FirstEnergy Corp. 167,800 167,800
General Motors Corp. 119,200 119,200
Prudential Financial, Inc. 174,300 174,300
Transocean Sedco Forex, Inc. 239,500 239,500
Tyco International Ltd. 92,400 214,900
SALES
Anheuser-Busch Companies, Inc. (136,500) 0
Avon Products, Inc. (338,700) 0
Baxter International, Inc. (100,000) 0
CMS Energy Corp. (232,200) 0
J.P. Morgan Chase & Co. (158,250) 0
Masco Corp. (340,000) 0
Pharmacia Corp. (149,240) 207,000
Reliant Energy, Inc. (189,300) 0
Teva Pharmaceutical Industries Ltd. (70,000) 0
The Williams Companies, Inc. (182,437) 0
XL Capital Ltd. (120,600) 152,100
19
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2001
COMMON STOCKS (95.8%) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (10.0%)
AUTOMOBILE (0.5%)
General Motors Corp. 119,200 $ 5,793,120
----------------
HOTELS, RESTAURANTS & LEISURE (1.9%)
Carnival Corp. 200,000 5,616,000
International Game Technology (a) 80,900 5,525,470
McDonald's Corp. 398,800 10,556,236
----------------
21,697,706
----------------
MEDIA (3.6%)
AOL Time Warner, Inc. (a) 178,900 5,742,690
Clear Channel Communications, Inc. (a) 268,400 13,664,244
Gannett Co., Inc. 100,900 6,783,507
Pixar, Inc. (a) 122,100 4,390,716
The Reader's Digest Association, Inc. 221,400 5,109,912
The Walt Disney Co. 224,500 4,651,640
----------------
40,342,709
----------------
MULTI-LINE RETAIL (2.8%)
May Department Stores Co. 100,000 3,698,000
Sears, Roebuck & Co. 128,700 6,131,268
Target Corp. 165,000 6,773,250
Wal-Mart Stores, Inc. 257,500 14,819,125
----------------
31,421,643
----------------
SPECIALTY RETAIL (1.2%)
The Home Depot, Inc. 273,150 13,933,382
----------------
CONSUMER STAPLES (3.9%)
FOOD & DRUG RETAILING (0.9%)
CVS Corp. 120,000 3,552,000
The Kroger Corp. (a) 300,000 6,261,000
----------------
9,813,000
----------------
FOOD PRODUCTS (1.0%)
ConAgra Foods, Inc. 239,100 5,683,407
Heinz (H.J.) Co. 141,500 5,818,480
----------------
11,501,887
----------------
PERSONAL PRODUCTS (0.8%)
The Gillette Co. 286,300 9,562,420
----------------
TOBACCO (1.2%)
Philip Morris Companies, Inc. 125,400 5,749,590
UST, Inc. 240,300 8,410,500
----------------
14,160,090
----------------
See Notes to Schedule of Investments.
20
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
ENERGY (6.9%)
ENERGY EQUIPMENT & SERVICES (1.3%)
Nabors Industries, Inc. (a) 178,300 $ 6,121,039
Transocean Sedco Forex, Inc. 239,500 8,099,890
----------------
14,220,929
----------------
OIL & GAS (5.6%)
Anadarko Petroleum Corp. 102,200 5,810,070
Apache Corp. 119,590 5,965,149
Burlington Resources, Inc. 69,200 2,597,768
ChevronTexaco Corp. 138,100 12,375,141
Conoco, Inc., Class A 364,700 10,321,010
Devon Energy Corp. 135,000 5,217,750
Exxon Mobil Corp. 152,700 6,001,110
Marathon Oil Corp. 414,800 12,444,000
PanCanadian Energy Corp. 114,433 2,975,258
----------------
63,707,256
----------------
FINANCIALS (23.6%)
BANKS (5.3%)
Bank of America Corp. 94,800 5,967,660
Comerica, Inc. 106,500 6,102,450
FleetBoston Financial Corp. 220,000 8,030,000
Golden West Financial Corp. 138,300 8,138,955
KeyCorp 241,500 5,878,110
SunTrust Banks, Inc. 88,200 5,530,140
Wachovia Corp. 196,000 6,146,560
Washington Mutual, Inc. 179,800 5,879,460
Wells Fargo & Co. 200,000 8,690,000
----------------
60,363,335
----------------
DIVERSIFIED FINANCIALS (10.0%)
American Express Co. 164,568 5,873,432
The Charles Schwab Corp. 419,150 6,484,251
Citigroup, Inc. 621,766 31,386,748
Countrywide Credit Industries, Inc. 358,500 14,687,745
Freddie Mac 495,400 32,399,160
Merrill Lynch & Co., Inc. 90,000 4,690,800
Morgan Stanley Dean Witter & Co. 50,000 2,797,000
Prudential Financial, Inc. (a) 174,300 5,785,017
Stilwell Financial, Inc. 334,700 9,110,534
----------------
113,214,687
----------------
See Notes to Schedule of Investments.
21
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
INSURANCE (7.8%)
ACE Ltd. 125,700 $ 5,046,855
AFLAC, Inc. 350,000 8,596,000
Allmerica Financial Corp. 129,200 5,755,860
American International Group, Inc. 165,809 13,165,235
The Hartford Financial Services Group, Inc. 86,700 5,447,361
MBIA, Inc. 90,700 4,864,240
MetLife, Inc. 189,900 6,016,032
The Progressive Corp. 173,600 25,918,480
XL Capital Ltd., Class A 152,100 13,895,856
----------------
88,705,919
----------------
REAL ESTATE (0.5%)
Kimco Realty Corp. 89,850 2,937,197
Vornado Realty Trust 62,000 2,579,200
----------------
5,516,397
----------------
HEALTH CARE (12.6%)
BIOTECHNOLOGY (6.3%)
Amgen, Inc. (a) 274,100 15,470,204
Biogen, Inc. (a) 121,300 6,956,555
Genentech, Inc. (a) 285,300 15,477,525
Genzyme Corp. (a) 138,000 8,260,680
IDEC Pharmaceuticals Corp. (a) 146,000 10,063,780
Invitrogen Corp. (a) 95,000 5,883,350
MedImmune, Inc. (a) 100,000 4,635,000
Protein Design Labs, Inc. (a) 141,000 4,624,800
----------------
71,371,894
----------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.8%)
Applera Corp. - Applied Biosystems Group 65,000 2,552,550
Becton, Dickinson & Co. 201,700 6,686,355
----------------
9,238,905
----------------
HEALTH CARE PROVIDERS & SERVICES (1.2%)
Anthem, Inc. (a) 75,000 3,712,500
CIGNA Corp. 42,300 3,919,095
WellPoint Health Networks, Inc. (a) 49,800 5,819,130
----------------
13,450,725
----------------
PHARMACOLOGY (4.3%)
American Home Products Corp. 171,800 10,541,647
Biovail Corp. (a) 148,000 8,325,000
Eli Lilly and Co. 91,500 7,186,410
Pfizer, Inc. 271,825 10,832,226
Pharmacia Corp. 207,000 8,828,550
Schering-Plough Corp. 100,000 3,581,000
----------------
49,294,833
----------------
See Notes to Schedule of Investments
22
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS (7.9%)
AEROSPACE & DEFENSE (1.7%)
The Boeing Co. 200,000 $ 7,756,000
General Dynamics Corp. 73,300 5,837,612
United Technologies Corp. 91,900 5,939,497
----------------
19,533,109
----------------
AIR FREIGHT & COURIERS (1.0%)
CP Holders, Inc. 162,000 6,355,260
FedEx Corp. 100,000 5,188,000
----------------
11,543,260
----------------
AIRLINES (0.6%)
AMR Corp. (a) 100,000 2,217,000
Southwest Airlines Co. 256,700 4,743,816
----------------
6,960,816
----------------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
Paychex, Inc. 219,312 7,643,023
----------------
INDUSTRIAL CONGLOMERATES (2.8%)
General Electric Co. 276,700 11,090,136
Minnesota Mining & Manufacturing Co. 65,000 7,683,650
Tyco International Ltd. 214,900 12,657,610
----------------
31,431,396
----------------
MACHINERY (0.5%)
Caterpillar, Inc. 115,700 6,045,325
----------------
ROAD & RAIL (0.6%)
Union Pacific Corp. 112,700 6,423,900
----------------
INFORMATION TECHNOLOGY (22.7%)
COMMUNICATIONS EQUIPMENT (3.3%)
Brocade Communications Systems, Inc. (a) 142,300 4,712,976
Cisco Systems, Inc. (a) 536,900 9,723,259
Juniper Networks, Inc. (a) 53,600 1,015,720
Lucent Technologies, Inc. (a) 312,300 1,964,367
QUALCOMM, Inc. (a) 204,800 10,342,400
3Com Corp. (a) 1,435,500 9,158,490
----------------
36,917,212
----------------
COMPUTERS & PERIPHERALS (5.8%)
Apple Computer, Inc. (a) 265,400 5,812,260
Dell Computer Corp. (a) 659,700 17,930,646
EMC Corp. (a) 322,500 4,334,400
See Notes to Schedule of Investments.
23
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS (CONTINUED)
Hewlett-Packard Co. 484,500 $ 9,951,630
International Business Machines Corp. 114,150 13,807,584
Network Appliance, Inc. (a) 417,700 9,135,099
Sun Microsystems, Inc. (a) 341,200 4,210,408
----------------
65,182,027
----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.2%)
Agilent Technologies, Inc. (a) 358,800 10,229,388
Millipore Corp. 122,000 7,405,400
Solectron Corp. (a) 354,500 3,998,760
Waters Corp. (a) 85,000 3,293,750
----------------
24,927,298
----------------
IT CONSULTING & SERVICES (0.7%)
Computer Sciences Corp. (a) 54,500 2,669,410
Electronic Data Systems Corp. 75,000 5,141,250
----------------
7,810,660
----------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (6.1%)
Analog Devices, Inc. (a) 115,000 5,104,850
Applied Materials, Inc. (a) 326,710 13,101,071
Broadcom Corp., Class A (a) 135,000 5,517,450
Cypress Semiconductor Corp. (a) 111,400 2,220,202
Intel Corp. 396,800 12,479,360
Maxim Integrated Products, Inc. (a) 251,900 13,227,269
National Semiconductor Corp. (a) 56,800 1,748,872
Novellus Systems, Inc. (a) 92,000 3,629,400
Texas Instruments, Inc. 148,100 4,146,800
Xilinx, Inc. (a) 212,000 8,278,600
----------------
69,453,874
----------------
SOFTWARE (4.6%)
Microsoft Corp. (a) 345,485 22,895,291
Oracle Corp. (a) 371,700 5,133,177
Parametric Technology Corp. (a) 489,600 3,823,776
PeopleSoft, Inc. (a) 120,000 4,824,000
Siebel Systems, Inc. (a) 384,800 10,766,704
VERITAS Software Corp. (a) 109,000 4,885,380
----------------
52,328,328
----------------
MATERIALS (3.0%)
CHEMICALS (0.5%)
Syngenta AG (a)(b) 575,900 6,104,540
----------------
See Notes to Schedule of Investments.
24
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
----------------------------------------------------------------------------------------------------------------------------------
METALS & MINING (1.6%)
Alcoa, Inc. 309,800 $ 11,013,390
United States Steel Corp. 366,900 6,644,559
----------------
17,657,949
----------------
PAPER & FOREST PRODUCTS (0.9%)
Georgia-Pacific Group. 209,200 5,776,012
International Paper Co. 113,000 4,559,550
----------------
10,335,562
----------------
TELECOMMUNICATION SERVICES (2.8%)
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
Sprint Corp. (FON Group) 782,900 15,720,632
Verizon Communications, Inc. 221,054 10,491,223
WorldCom, Inc. - WorldCom Group (a) 360,000 5,068,800
----------------
31,280,655
----------------
UTILITIES (2.4%)
ELECTRIC UTILITIES (1.8%)
Dominion Resources, Inc. 99,000 5,949,900
Duke Energy Corp. 76,800 3,015,168
FirstEnergy Corp. 167,800 5,869,644
Progress Energy, Inc. 136,710 6,156,051
----------------
20,990,763
----------------
GAS UTILITIES (0.6%)
El Paso Corp. 143,000 6,379,230
----------------
TOTAL COMMON STOCKS (Cost of $987,154,842) 1,086,259,764
----------------
PREFERRED STOCK (0.4%)
CONSUMER DISCRETIONARY (0.4%)
MEDIA (0.4%)
The News Corp. Ltd. (b) (Cost $4,611,740) 150,000 3,969,000
----------------
See Notes to Schedule of Investments
25
INTEREST MATURITY PAR
SHORT-TERM INVESTMENTS (4.7%) RATE DATE VALUE MARKET VALUE
---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (2.4%)
American Express 1.75% 01/15/02 $2,500,000 $ 2,498,299
1.76 01/17/02 4,000,000 3,996,871
1.95 01/31/02 3,000,000 2,995,375
Household Finance Corp 1.75 01/03/02 2,500,000 2,499,757
1.83 01/22/02 3,500,000 3,496,264
1.94 01/08/02 2,500,000 2,499,057
1.94 01/10/02 2,000,000 1,999,030
Tyco Capital Corp 1.80 01/24/02 3,500,000 3,495,975
1.81 01/29/02 4,000,000 3,994,369
---------------
TOTAL COMMERCIAL PAPER (COST $27,474,997) 27,474,997
---------------
REPURCHASE AGREEMENT (2.3%)
Repurchase Agreement with SBC Warburg Ltd., dated 12/31/01
at 1.73% to be repurchased at $25,903,489 on 01/02/02,
collateralized by U.S. Treasury Bonds and/or notes with various
maturities to 2027, with a current market value of $26,349,087.
(Cost $25,901,000) 25,901,000 25,901,000
---------------
TOTAL SHORT-TERM INVESTMENTS (COST $53,375,997) 53,375,997
---------------
TOTAL INVESTMENTS (100.9%) (COST $1,045,142,579) (c) 1,143,604,761
OTHER ASSETS AND LIABILITIES, NET (-0.9%) (10,441,082)
---------------
NET ASSETS (100.0%) $1,133,163,679
===============
NET ASSET VALUE PER SHARE (106,447,090 SHARES OUTSTANDING) $10.65
===============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Cost for federal income tax purposes is $1,049,973,862. The difference
between cost for Generally Accepted Accounting Principles and cost on
a Tax basis is related to timing differences. Realized losses have
been deferred for Tax purposes and cost adjusted accordingly.
Gross unrealized appreciation and depreciation of investments at
December 31, 2001 is as follows:
Gross unrealized appreciation $ 211,974,513
Gross unrealized depreciation (118,343,614)
--------------
Net unrealized appreciation $ 93,630,899
==============
See Notes to Financial Statements.
26
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2001
ASSETS:
Investments at market value (identified cost $1,045,142,579) $1,143,604,761
Receivable for investments sold 12,271,739
Dividends and interest receivable 647,054
Other assets 6,416
--------------
TOTAL ASSETS 1,156,529,970
--------------
LIABILITIES:
Payable due to custodian bank 1,436
Payable for investments purchased 9,813,113
Distributions payable to shareholders 12,357,289
Management, administrative and bookkeeping fees payable 862,380
Accrued expenses 332,073
--------------
TOTAL LIABILITIES 23,366,291
--------------
NET ASSETS $1,133,163,679
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized, 106,447,090 shares outstanding) $1,037,047,615
Accumulated net realized gain on investments less distributions (2,346,118)
Net unrealized appreciation on investments 98,462,182
--------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($10.65 PER SHARE) $1,133,163,679
==============
See Notes to Financial Statements.
27
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001
INVESTMENT INCOME:
Dividends $ 14,113,866
Interest 1,248,875
--------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $47,901) 15,362,741
EXPENSES:
Management fee $ 8,559,470
Administrative fee 2,142,185
Bookkeeping and pricing fees 233,932
Custodian and transfer agent fees 326,794
Shareholder communication expenses 559,011
Legal and audit fees 97,952
Trustees' fees and expense 102,536
NYSE fee 93,126
Miscellaneous expenses 99,115
--------------
TOTAL EXPENSES 12,214,121
--------------
CUSTODY EARNINGS CREDIT (1,525)
--------------
NET EXPENSES 12,212,596
--------------
NET INVESTMENT INCOME 3,150,145
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 825,868,477
Cost of investments sold 799,802,794
--------------
Net realized gain on investment transactions 26,065,683
Net unrealized appreciation on investments:
Beginning of year 303,766,825
End of year 98,462,182
--------------
Change in unrealized appreciation-net (205,304,643)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(176,088,815)
==============
See Notes to Financial Statements.
28
YEAR ENDED DECEMBER 31,
---------------------------------
STATEMENT OF CHANGES IN NET ASSETS 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 3,150,145 $ 5,128,422
Net realized gain on investment transactions 26,065,683 167,110,714
Change in unrealized appreciation--net (205,304,643) (70,161,986)
---------------- ----------------
Net increase (decrease) in net assets resulting from operations (176,088,815) 102,077,150
---------------- ----------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (3,150,145) (5,712,380)
Net realized gain on investments (119,953,062) (135,687,387)
---------------- ----------------
Total distributions (123,103,207) (141,399,767)
---------------- ----------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions 56,182,988 19,294,351
---------------- ----------------
Total decrease in net assets (243,009,034) (20,028,266)
NET ASSETS:
Beginning of year 1,376,172,713 1,396,200,979
---------------- ----------------
End of year $1,133,163,679 $1,376,172,713
================ ================
See Notes to Financial Statements.
29
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999 1998
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $13.61 $14.02 $14.22 $13.32
------------ ------------ ------------ ------------
Income from Investment Operations:
Net investment income 0.03 0.05 0.05 0.05
Net realized and unrealized gain
(loss) on investments (1.79) 0.96 1.22 2.35
Provision for federal income tax -- -- -- --
------------ ------------ ------------ ------------
Total from Investment Operations (1.76) 1.01 1.27 2.40
------------ ------------ ------------ ------------
Less Distributions from:
Net investment income (0.03) (0.06) (0.05) (0.05)
Realized capital gain (1.17) (1.36) (1.34) (1.35)
Return of capital -- -- -- --
------------ ------------ ------------ ------------
Total Distributions (1.20) (1.42) (1.39) (1.40)
------------ ------------ ------------ ------------
Change due to rights offering (b) -- -- -- (0.10)
Impact of shares issued in dividend
reinvestment (c) -- -- (0.08) --
------------ ------------ ------------ ------------
Total Distributions, Reinvestments
and Rights Offering (1.20) (1.42) (1.47) (1.50)
------------ ------------ ------------ ------------
Net asset value at end of year $10.65 $13.61 $14.02 $14.22
============ ============ ============ ============
Market price at end of year $11.09 $12.375 $11.063 $12.938
============ ============ ============ ============
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value (12.7)% 8.8% 10.2% 19.8%
Based on market price 0.0% 25.4% (4.4)% 9.1%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $1,133 $1,376 $1,396 $1,351
Ratio of expenses to average net assets 1.03% 0.96% 0.97% 1.00%
Ratio of net investment income to
average net assets 0.27% 0.37% 0.37% 0.39%
Portfolio turnover rate 64% 83% 90% 76%
(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.
(d) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
See Notes to Financial Statements.
30
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $11.95 $11.03 $9.26 $10.40 $10.78 $11.20
------------ ------------ ------------ --------- ---------- -----------
Income from Investment Operations:
Net investment income 0.05 0.08 0.10 0.11 0.12 0.16
Net realized and unrealized gain
(loss) on investments 3.01(a) 2.15(a) 2.71 (0.20) 0.78(a) 0.54
Provision for federal income tax (0.36) (0.13) -- -- (0.18) --
------------ ------------ ------------ --------- ---------- -----------
Total from Investment Operations 2.70 2.10 2.81 (0.09) 0.72 0.70
------------ ------------ ------------ --------- ---------- -----------
Less Distributions from:
Net investment income (0.05) (0.08) (0.10) (0.12) (0.12) (0.18)
Realized capital gain (1.28) (1.10) (0.94) (0.52) (0.58) (0.66)
Return of capital -- -- -- (0.36) (0.37) (0.23)
------------ ------------ ------------ --------- ---------- -----------
Total Distributions (1.33) (1.18) (1.04) (1.00) (1.07) (1.07)
------------ ------------ ------------ --------- ---------- -----------
Change due to rights offering (b) -- -- -- (0.05) (0.03) (0.05)
Impact of shares issued in dividend
reinvestment (c) -- -- -- -- -- --
------------ ------------ ------------ --------- ---------- -----------
Total Distributions, Reinvestments
and Rights Offering (1.33) (1.18) (1.04) (1.05) (1.10) (1.12)
------------ ------------ ------------ --------- ---------- -----------
Net asset value at end of year $13.32 $11.95 $11.03 $9.26 $10.40 $10.78
============ ============ ============ ========= ========== ===========
Market price at end of year $13.313 $11.250 $10.875 $8.500 $11.125 $11.125
============ ============ ============ ========= ========== ===========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 26.6% 21.7% 31.8% (0.8%) 8.8% 6.9%
Based on market price 34.4% 16.2% 41.4% (14.9%) 12.7% 14.9%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $1,150 $988 $872 $710 $725 $665
Ratio of expenses to average net assets 1.01% 1.03% 1.06% 1.07% 1.08% 1.08%
Ratio of net investment income to
average net assets 0.38% 0.73% 0.92% 1.16% 1.08% 1.44%
Portfolio turnover rate 99% 70% 54% 44% 72% 57%
See Notes to Financial Statements.
31
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Equity Fund ("All-Star" or the "Fund"), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. All-Star's investment objective is to seek total
investment return, comprised of long term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities. All-Star is managed by Liberty Asset Management Company (the
"Manager").
The following is a summary of significant accounting policies followed by
All-Star in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
VALUATION OF INVESTMENTS - Portfolio securities listed on an exchange and
over-the-counter securities quoted on the NASDAQ system are valued on the basis
of the last sale on the date as of which the valuation is made, or, lacking any
sales, at the current bid prices. Over-the-counter securities not quoted on the
NASDAQ system are valued on the basis of the mean between the current bid and
asked prices on that date. Securities for which reliable quotations are not
readily available are valued at fair value, as determined in good faith and
pursuant to procedures established by the Board of Trustees (Trustees).
Short-term instruments maturing in more than 60 days for which market quotations
are readily available are valued at current market value. Short-term instruments
with remaining maturities of 60 days or less are valued at amortized cost,
unless the Trustees determine that this does not represent fair value.
PROVISION FOR FEDERAL INCOME TAX - The Fund qualifies as a "regulated investment
company." As a result, a federal income tax provision is not required for
amounts distributed to shareholders.
OTHER - Security transactions are accounted for on the trade date. Interest
income and expenses are recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date.
NOTE 2. FEES PAID TO AFFILIATES
Under All-Star's Management and Portfolio Management Agreements, All-Star pays
the Manager a management fee for its investment management services at an annual
rate of 0.80% of All-Star's average weekly net assets. The Manager pays each
Portfolio Manager a portfolio management fee at an annual rate of 0.40% of the
average weekly net assets of the portion of the investment portfolio managed by
it. All-Star also pays the Manager an administrative fee for its administrative
services at an annual rate of 0.20% of All-Star's average weekly net assets. The
annual fund management and administrative fees are reduced to 0.72% and 0.18%,
respectively, on average weekly net assets in excess of $400 million and the
aggregate annual fees payable by the Manager to the Portfolio Managers are
reduced to 0.36% of All-Star's average weekly net assets in excess of $400
million. The annual fund management and administrative fees are further reduced
to 0.648% and 0.162%, respectively, on average weekly net assets in excess of
$800 million to $1.2 billion and 0.584% and 0.146%, respectively, on average
weekly net assets in excess of $1.2 billion. The aggregate annual fees payable
by the Manager to the Portfolio Managers are also reduced to 0.324% of the
Fund's average weekly net assets in excess of $800 million to $1.2 billion and
0.292% of the Fund's average net assets in excess of $1.2 billion.The Manager is
responsible for providing pricing and bookkeeping services to the Fund under a
Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing
Agreement"), the Manager has delegated those functions to State Street Bank and
Trust Company ("State Street"). The Manager pays fees to State Street under the
Outsourcing Agreement.
During the period January 1, 2001 to June 30, 2001, Colonial Management
Associates, Inc., an affiliate of the Manager, provided bookkeeping and pricing
services to the Fund for a monthly fee equal to $36,000 annually plus 0.0233%
annually of the Fund's average weekly net assets over $50 million, 0.0167% in
excess of $500 million, and 0.015% in excess of $1 billion. Effective July 1,
32
2001, under its pricing and bookkeeping agreement with the Fund, the Manager
receives from the Fund an annual flat fee or $10,000, paid monthly, and in any
month that the Fund's average weekly net assets are more than $50 million, a
monthly fee equal to the average weekly net assets of the Fund for that month
multiplied by a fee rate that is calculated by taking into account the fees
payable to State Street under the Outsourcing Agreement.
On November 1, 2001, Liberty Financial Companies, Inc., the former parent of
the Manager, completed the sale of its asset management business, including the
Manager, to Fleet National Bank (Fleet), an indirect wholly owned subsidiary of
FleetBoston Financial Corporation. This transaction resulted in a change of
control of the Manager and, therefore, an assignment of the Manager's investment
advisory agreement and an assignment of the portfolio management agreements with
the Fund. The Fund had obtained approval of a new investment advisory agreement
and new portfolio management agreement by the Fund's Trustees and shareholders,
which became effective upon completion of the sale. The new contracts are
identical to the prior contract in all material respects except for their
effective and termination dates.
OTHER - The Fund has an agreement with its custodian bank under which $1,525 of
custody fees were reduced by balance credits for the year ended December 31,
2001. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing asset if
it had not entered into such agreements.
NOTE 3. CAPITAL TRANSACTIONS
During the years ended December 31, 2001, and December 31, 2000, distributions
in the amount of $56,182,987 and $19,294,351 respectively, were paid in newly
issued shares valued at market value or net asset value, but not less than 95%
of market value, resulting in the issuance of 5,333,568 and 1,535,869 shares,
respectively.
NOTE 4. SECURITIES TRANSACTIONS
Realized gains and losses are recorded on the identified cost basis for both
financial reporting and federal income tax purposes. The cost of investments
purchased and the proceeds from investments sold excluding short-term debt
obligations for the year ended December 31, 2001 were $750,053,044 and
$825,868,477, respectively.
The Fund may enter into repurchase agreements and require the seller of the
instrument to maintain on deposit with the Fund's custodian bank or in the
Federal Reserve Book-Entry System securities in the amount at all times equal to
or in excess of the value of the repurchase agreement, plus accrued interest.
The Fund may experience costs and delays in liquidating the collateral if the
issuer defaults or enters bankruptcy.
NOTE 5. DISTRIBUTIONS TO SHAREHOLDERS
All-Star currently has a policy of paying distributions on its common shares
totaling approximately 10% of its net asset value per year, payable in four
quarterly distributions of 2.5% of All-Star's net asset value at the close of
the New York Stock Exchange on the Friday prior to each quarterly declaration
date.
Distributions to shareholders are recorded on the ex-dividend date. Income
and capital gain distributions are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting principles.
Reclassifications are made to the Fund's capital accounts to reflect income and
gains available for distribution (or available capital loss carry-forwards)
under income tax regulations. These reclassifications are excluded from the per
share amount in the Financial Highlights.
The tax composition of dividends represented by ordinary income and
long-term capital gains was $41,109,537 and $81,993,670, respectively.
33
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND THE TRUSTEES OF LIBERTY ALL-STAR EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and changes
in net assets and the financial highlights present fairly, in all material
respects, the financial position of Liberty All-Star Equity Fund (the "Fund") at
December 31, 2001, the results of its operations, the changes in its net assets
and the financial highlights for years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating our overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at December 31, 2001 by correspondence with the custodian, provide a reasonable
basis for our opinion. The financial highlights of the Fund for periods prior to
January 1, 1999 were audited by other independent accountants whose report dated
February 12, 1999 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2002
34
AUTOMATIC DIVIDEND REINVESTMENT & CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to participate and have all their Fund dividends
and distributions automatically reinvested by EquiServe Trust Company, N.A., as
agent for participants in the Plan (the "Plan Agent"), in additional shares of
the Fund. For further information and enrollment forms, call Investor Assistance
at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 a.m. and 5 p.m. Eastern
Time.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee can participate in the Plan only if their brokerage firm, bank or
nominee is able to do so on their behalf. Shareholders participating in the Plan
through a brokerage firm may not be able to transfer their shares to another
brokerage firm and continue to participate in the Plan.
Under the Plan, distributions declared payable in shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional shares valued at the lower of market value or net
asset value per share on the valuation date for the distribution (but not at a
discount of more than 5 percent from market price). Distributions declared
payable only in cash will be reinvested for the accounts of participants in the
Plan in additional shares purchased by the Plan Agent on the open market at
prevailing market prices. If, prior to the Plan Agent's completion of such open
market purchases, the market price of a share equals or exceeds its net asset
value, the remainder of the distribution will be paid in newly issued shares
valued at net asset value (but not at a discount of more than 5% from market
price). Dividends and distributions are subject to taxation, whether received in
cash or in shares.
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in shares of the Fund purchased
on the open market. These voluntary cash payments will be invested on or shortly
after the 15th day of each calendar month, and voluntary payments should be sent
so as to be received by the Plan Agent no later than five business days before
the next investment date. Barring suspension of trading, voluntary cash payments
will be invested within 45 days of receipt. A participant may withdraw a
voluntary cash payment by written notice received by the Plan Agent at least 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There is no charge to participants for reinvesting distributions pursuant to
the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written notice
to the Plan Agent, EquiServe Trust Company, N.A., P.O. Box 43011, Providence, RI
02940-3011. Such termination will be effective immediately if received not less
than 10 days prior to the record date for a dividend or distribution; otherwise
it will be effective on the first business day after the payment date of such
dividend or distribution. On termination, participants may either have
certificates for the Fund shares in their Plan accounts delivered to them or
have the Plan Agent sell such shares in the open market and deliver the
proceeds, less a $2.50 fee plus brokerage commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
35
TAX INFORMATION (UNAUDITED)
All 2001 distributions whether received in cash or shares of theFund consist of
the following:
(1) ordinary income and
(2) long-term capital gains distributions
Below is a table that details the breakdown of each 2001 distribution for
federal income tax purposes.
TAX STATUS OF 2001 DISTRIBUTIONS
ORDINARY INCOME
--------------------------------
NET SHORT-TERM LONG-TERM
AMOUNT INVESTMENT CAPITAL CAPITAL
DATE PAID PER SHARE INCOME GAINS GAINS
----------------------------------------------------------------------------------------------------
03/19/01 $0.33 -- 39.32% 60.68%
07/02/01 $0.31 -- 39.32% 60.68%
10/09/01 $0.31 0.89% 38.97% 60.14%
01/02/02 $0.25 10.90% -- 89.10%*
*100% of the Long-Term Capital Gains distribution paid on 01/02/02 is from
qualified 5-year capital gains.
FOR CORPORATE SHAREHOLDERS
28% of the ordinary income dividends qualify for the 70% dividend received
deduction available for corporations for the year ended December 31, 2001.
36
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
On September 26, 2001, a Special Meeting of Shareholders of the Fund was held to
conduct a vote for or against the approval of the items listed on the Fund's
Proxy Statement for said Meeting. On July 16, 2001, the record date for the
Meeting, the Fund had shares outstanding of 103,077,108.002. The votes cast were
as follows:
1. PROPOSAL OF NEW INVESTMENT ADVISORY AGREEMENT:
For 94,393,883.325
Against 1,787,502.285
Abstain 1,739,889.672
2. PROPOSAL OF NEW PORTFOLIO MANAGEMENT AGREEMENT WITH MASTRAPASQUA &
ASSOCIATES, INC.:
For 94,227,400.122
Against 1,801,599.180
Abstain 1,892,275.980
3. PROPOSAL OF NEW PORTFOLIO MANAGEMENT AGREEMENT WITH OPPENHEIMER CAPITAL:
For 94,532,074.264
Against 1,612,867.026
Abstain 1,776,333.992
4. PROPOSAL OF NEW PORTFOLIO MANAGEMENT AGREEMENT WITH BOSTON PARTNERS ASSET
MANAGEMENT, L.P.:
For 94,310,366.508
Against 1,698,865.496
Abstain 1,912,043.278
5. PROPOSAL OF NEW PORTFOLIO MANAGEMENT AGREEMENT WITH WESTWOOD MANAGEMENT
CORPORATION:
For 94,224,801.755
Against 1,757,307.435
Abstain 1,939,166.092
6. PROPOSAL OF NEW PORTFOLIO MANAGEMENT AGREEMENT WITH TCW INVESTMENT MANAGEMENT
COMPANY:
For 94,131,648.139
Against 1,903,587.876
Abstain 1,886,039.267
37
TRUSTEES AND OFFICERS
The names of the Trustees and Officers of the Liberty All-Star Equity Fund, the
date each was first elected or appointed to office, their term of office, their
principal business occupations and other directorships they have held during at
least the last five years, are shown below.
DISINTERESTED TRUSTEE(S)
NUMBER OF
NAME POSITION TERM OF PRINCIPAL PORTFOLIOS IN
(AGE) WITH LIBERTY OFFICE AND OCCUPATION(S) FUND COMPLEX OTHER
AND ALL-STAR LENGTH OF DURING PAST OVERSEEN DIRECTOR-
ADDRESS EQUITY FUND SERVICE FIVE YEARS BY TRUSTEE SHIPS HELD
-----------------------------------------------------------------------------------------------------------------------------------
Robert J. Birnbaum Trustee Trustee Since Retired since January 1994; 2 Dresdner RCM
(Age 74) 1994; Term Special Counsel, Dechert, Global Funds
c/o Liberty Asset Expires 2003 Price & Rhoads (September (investment compa-
Management Company 1988 to December 1993); nies) and Chicago
One Financial Center President and Chief Options Exchange
Boston, MA 02111 Operating Officer, New York Board
Stock Exchange, Inc.
(May 1985 to June 1988)
James E. Grinnell Trustee Trustee Since Private investor since 2 None
(Age 71) 1986; Term November 1988; President
c/o Liberty Asset Expires 2002 and Chief Executive Officer,
Management Company Distribution Management
One Financial Center Systems, Inc. (1983 to May
Boston, MA 02111 1986); Senior Vice President,
Operations, The Rockport
Company (importer and dis-
tributor of shoes) (May 1986
to November 1988).
Richard W. Lowry Trustee Trustee Since Private investor since 1987 105 None
(Age 65) 1986; Term (formerly Chairman and
c/o Liberty Asset Expires 2004 Chief Executive Officer, U.S.
Management Company Plywood Corporation (build-
One Financial Center ing products manufacturer).
Boston, MA 02111
John J. Neuhauser Trustee Trustee Since Academic Vice President 105 Saucony, Inc.
(Age 58) 1998; Term and Dean of Faculties since (athletic footwear);
c/o Liberty Asset Expires 2004 August 1999, Boston College SkillSoft Corp.
Management Company (formerly Dean, Boston (E-Learning).
One Financial Center College School of Manage-
Boston, MA 02111 ment from September 1977
to September 1999).
38
INTERESTED TRUSTEE
NUMBER OF
NAME POSITION TERM OF PRINCIPAL PORTFOLIOS IN
(AGE) WITH LIBERTY OFFICE AND OCCUPATION(S) FUND COMPLEX OTHER
AND ALL-STAR LENGTH OF DURING PAST OVERSEEN DIRECTOR-
ADDRESS EQUITY FUND SERVICE FIVE YEARS BY TRUSTEE SHIPS HELD
-----------------------------------------------------------------------------------------------------------------------------------
William E. Mayer* Trustee Trustee Since Managing Partner, Park 105 Johns Manville
(Age 61) 1998; Term Avenue Equity Partners (building products
c/o Liberty Asset Expires 2003 (venture capital) since manufacturer), Lee
Management Company February 1999 (formerly Enterprises (print
One Financial Center Founding Partner, and on-line media);
Boston, MA 02111 Development Capital, LLC WR Hambrecht +
from November 1996 to Co. (financial service
February 1999; Dean and provider); First Health
Professor, College of (healthcare); Systech
Business and Management, Retail Systems (retail
University of Maryland industry technology
from October, 1992 to provider).
November 1996).
* A TRUSTEE WHO IS AN "INTERESTED PERSON" (AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940 ("1940 ACT")) OF LIBERTY ALL-STAR EQUITY FUND OR LAMCO. MR. MAYER
IS AN INTERESTED PERSON BY REASON OF HIS AFFILIATION WITH WR HAMBRECHT + CO.
OFFICERS
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PAST FIVE YEARS
---------------------------------------------------------------------------------------------------------------------------------
William R. Parmentier, Jr. (Age 49) President 1998 President and Chief Executive Officer (since
Liberty Asset Management Company August 1998) and Chief Investment Officer (since
One Financial Center April 1995), Senior Vice President (April 1995 to
Boston, MA 02111 August 1998), Liberty Asset Management
Company.
Christopher S. Carabell (Age 38) Vice President 1997 Senior Vice President, Product Development and
Liberty Asset Management Company Marketing (since January 1999), Vice President,
One Financial Center Investments, Liberty Asset Management
Boston, MA 02111 Company (March 1996 to January 1999);
Associate Director, U.S. Equity Research, BARRA
RogersCasey, investment consultants (January
1995 to February 1996).
Mark T. Haley, CFA (Age 37) Vice President 1999 Vice President-Investments (since January 1998),
Liberty Asset Management Company Director of Investment Analysis (December 1996
One Financial Center to December 1998), Investment Analyst (January
Boston, MA 02111 1994 to November 1996), Liberty Asset
Management Company.
39
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PAST FIVE YEARS
---------------------------------------------------------------------------------------------------------------------------------
J. Kevin Connaughton (Age 37) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty
One Financial Center All-Star Funds since December 2000 (formerly
Boston, MA 02111 Controller of the Liberty Funds and of the
Liberty All-Star Funds from February 1998 to
October 2000); Treasurer of the Stein Roe Funds
since February, 2001 (formerly Controller from
May 2000 to February 2001); Senior Vice
President of Liberty Funds Group LLC ("LFG")
since January 2001 (formerly Vice President from
April 2000 to January 2001; Vice President of
Colonial Management Associates, Inc.
("Colonial") from February 1998 to October
2000; Senior Tax Manager, Coopers & Lybrand,
LLP from April 1996 to January 1998).
Michelle G. Azrialy (Age 32) Controller 2001 Controller of the Liberty Funds and of the
One Financial Center Liberty All-Star Funds since May 2001; Vice
Boston, MA 02111 President of LFG since March 2001 (formerly
Assistant Vice President of Fund Administration
from September 2000 to February 2001;
Compliance Manager of Fund Administration
from September 1999 to August 2000) (formerly
Assistant Vice President and Assistant Treasurer,
Chase Global Fund Services - Boston from
August 1996 to September, 1999).
Vicki Benjamin (Age 40) Chief 2001 Chief Accounting Officer of the Liberty Funds
One Financial Center Accounting and of the Liberty All-Star Funds since June 2001;
Boston, MA 02111 Officer Vice President of LFG since April 2001 (formerly
Vice President, Corporate Audit, State Street
Bank and Trust Company from May 1998 to April
2001; Audit Manager from July 1994 to June
1997; Senior Audit Manager from July 1997 to
May 1998, Coopers & Lybrand, LLP).
Jean S. Loewenberg (Age 56) Secretary 2002 Secretary of the Liberty Funds and of the Liberty
One Financial Center All-Star Funds since February 2002; Senior Vice
Boston, MA 02111 President and Group Senior Counsel, Fleet
National Bank since November 1996.
40
[ALL-STAR EQUITY FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
160 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43011, Providence, Rhode Island 02940-3011
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
TRUSTEES
Robert J. Birnbaum*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Christopher S. Carabell, Vice President
Mark T. Haley, CFA, Vice President
J. Kevin Connaughton, Treasurer
Jean S. Loewenberg, Secretary
*Member of the audit committee.
USA
LISTED
NYSE
LIBERTY ALL-STAR
EQUITY FUND
[GRAPHIC]
SINCE 1986 - NYSE: USA
[ALL-STAR 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
A MEMBER OF THE
CLOSED-END
FUND
ASSOCIATION, INC.
www.closed-endfunds.com