LIBERTY ALL-STAR^® EQUITY FUND

Period Ended March 31, 2015 (Unaudited)

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*

Sources of distributions to shareholders may include ordinary dividends, long-term capital gains and return of capital. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. Pursuant to Section 852 of the Internal Revenue Code, the taxability of this distribution will be reported on Form 1099-DIV for 2015.

Returns for the Fund are total returns, which include dividends. Performance returns are net of management fees andother Fund expenses.

The figure shown for the Lipper Large-Cap Core Mutual Fund Average is based on open-end mutual funds’ total returns, which include dividends, and are net of fund expenses. Figures for the unmanaged Dow Jones Industrial Average, NASDAQ Composite Index and the S&P 500^® Index are total returns, including dividends. A description of the Lipper benchmark and the market indices can be found on page 19.

Past performance cannot predict future results. Performance will fluctuate with market conditions. Current performance may be lower or higher than the performance data shown. Performance information does not reflect the deduction of taxes that shareholders would pay on Fund distributions or the sale of Fund shares. An investment in the Fund involves risk, including loss of principal.

Closed-end funds raise money in an initial public offering and shares are listed and traded on an exchange. Open-end mutual funds continuously issue and redeem shares at net asset value. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the Fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.

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Although roiled by volatility that took the S&P 500^® Index up or down by 1 percent or more 19 times during the first quarter, stocks ended the period little-changed from their December 31 close. The S&P 500^® returned 0.95 percent, marking its ninth consecutive quarterly gain. The widely followed Dow Jones Industrial Average gained 0.33 percent, while the technology-focused NASDAQ Composite Index was the best performer, returning 3.79 percent.

A range of factors tended to counterbalance each other over the quarter, leading to the flattish returns. On the positive side, interest rates remained at record low levels and the Federal Reserve indicated that it was in no hurry to raise key short-term rates. In addition, the European Central Bank launched a major stimulus program in an effort to jump start economic growth across the continent. The employment picture continued to improve, with 200,000-plus nonfarm jobs being added in January and February (but just 126,000 in March). At the same time, however, investors had concerns. The dollar rose 13 percent against the euro, making U.S. products more expensive abroad. Related to exchange rates, investors were also concerned that corporate profits in the U.S. would suffer owing to the stronger dollar and, further, would not compare favorably with earlier quarters. Lower oil prices were a mixed blessing: While they bode well for consumers, they will cost jobs, reduce capital spending and impact profits in the energy sector. Finally, like last year, harsh winter weather was seen as a drag on the economy as GDP slowed to 0.2 percent in the first quarter of 2015.

Of relevance for Liberty All-Star® Equity Fund investors, growth stocks outperformed their value counterparts during the quarter. The Russell 1000® Growth Index returned 3.84 percent for the quarter versus -0.72 percent for the Russell 1000® Value Index. As noted below, this served as a modest drag on Fund performance as three of the Fund’s managers practice the value style and two practice the growth style.

Liberty All-Star^® Equity Fund

Liberty All-Star^® Equity Fund returns were modestly negative for the quarter. The Fund returned -0.10 percent with shares valued at net asset value (NAV) with dividends reinvested and -0.70 percent with shares valued at market price with dividends reinvested. (Fund returns are net of fees.) The Lipper Large-Cap Core Mutual Fund Average returned 0.91 percent. The discount at which Fund shares traded relative to their underlying NAV widened this quarter, ranging from a low of -11.8 percent to a high of -14.3 percent.

Fund returns lagged during January owing to underweights in three outperforming sectors—consumer staples, health care and utilities—but outperformed during the final two months of the quarter. For the quarter, the Fund’s market price performance was hurt by the previously mentioned wider discount to NAV.

In Fund news, the Board of Trustees approved an increase in the Fund’s distribution policy from an annual rate of approximately 6 percent (1.5 percent quarterly) of NAV to approximately 8 percent (2.0 percent quarterly). The increase was adopted primarily to better align the Fund’s distribution rate with historical equity market returns. The first distribution under the new rate is payable on June 15, 2015, to shareholders of record on May 1, 2015. The Fund’s distribution for the first quarter was $0.10. The distribution policy has been in place since 1988 and is a major component of the Fund’s total return. These distributions add up to $24.76 since 1987 (the Fund's first full calendar year of operations). We would emphasize that shareholders must include these distributions when determining the return on their investment in the Fund.

 

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Absent major economic, financial or geopolitical news, equity market returns belied underlying volatility and showed little change over the course of the three-month period. Regardless of the investment environment, the Fund’s managers will continue to practice their disciplines and we at Liberty All-Star^® Equity Fund will remain committed to the best long-term interests of our shareholders. We look forward to updating you once again at mid-year.

Sincerely,

 

 

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star^® Equity Fund

The views expressed in the President’s letter reflect the views of the President as of April 2015 and may not reflect his views on the date this report is first published or anytime thereafter. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions and the Fund disclaims any responsibility to update such views.  These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent.

 

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Liberty All-Star® Equity Fund	Table of Distributions & Rights Offerings
	March 31, 2015 (Unaudited)

 

*	The Fund’s net investment income and net realized capital gains exceeded the amount to be distributed under the Fund’s distribution policy. In each case, the Fund elected to pay taxes on the undistributed income and passed through a proportionate tax credit to shareholders.

**	The number of shares offered was increased by an additional 25 percent to cover a portion of the over-subscription requests.

***	Effective with the second quarter distribution, the annual distribution rate was changed from 10 percent to 6 percent.

†	Effective March 30, 2015, the Fund’s distribution policy increased from an annual rate of approximately 6 percent (1.5 percent quarterly) of net asset value to approximately 8 percent (2 percent quarterly) of net asset value.

 

DISTRIBUTION POLICY

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The current policy is to pay distributions on its shares totaling approximately 8 percent of its net asset value per year, payable in four quarterly installments of 2.0 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. Sources of distributions to shareholders may include ordinary dividends, long-term capital gains and return of capital. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. If a distribution includes anything other than net investment income, the Fund provides a Section 19(a) notice of the best estimate of its distribution sources at that time. These estimates may not match the final tax characterization (for the full year’s distributions) contained in shareholders’ 1099-DIV forms after the end of the year. If the Fund’s ordinary dividends and long-term capital gains for any year exceed the amount distributed under the distribution policy, the Fund may, in its discretion, retain and not distribute capital gains and pay income tax thereon to the extent of such excess.

 

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Top 20 Holdings & Economic Sectors	Liberty All-Star® Equity Fund
March 31, 2015 (Unaudited)

 

 

*	Because the Fund is actively managed, there can be no guarantee that the Fund will continue to hold securities of the indicated issuers and sectors in the future.

 

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The following are the major ($5 million or more) stock changes - both purchases and sales - that were made in the Fund’s portfolio during the first quarter of 2015.

 

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Investment Managers/ Portfolio Characteristics	Liberty All-Star® Equity Fund
March 31, 2015 (Unaudited)

 

THE FUND’S ASSETS ARE APPROXIMATELY EQUALLY DISTRIBUTED AMONG THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:

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MANAGERS’ DIFFERING INVESTMENT STRATEGIES ARE REFLECTED IN PORTFOLIO CHARACTERISTICS

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The portfolio characteristics table below is a regular ­feature of the Fund’s shareholder reports. It serves as a useful tool for understanding the value of a multi-managed portfolio. The characteristics are different for each of the Fund’s five investment managers. These differences are a reflection of the fact that each pursues a ­different investment style. The shaded column highlights the characteristics of the Fund as a whole, while the final column shows portfolio characteristics for the S&P 500^® Index.

PORTFOLIO CHARACTERISTICS As of March 31, 2015 (Unaudited)

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*	Certain holdings are held by more than one manager.

**	Excludes negative earnings.

Liberty All-Star® Equity Fund	Schedule of Investments
	As of March 31, 2015 (Unaudited)

 

 

See Notes to Schedule of Investments.
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See Notes to Schedule of Investments.
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Liberty All-Star® Equity Fund	Schedule of Investments
	As of March 31, 2015 (Unaudited)

 

 

See Notes to Schedule of Investments.
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See Notes to Schedule of Investments.
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See Notes to Schedule of Investments.
First Quarter Report (Unaudited) | March 31, 2015	11

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See Notes to Schedule of Investments.
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Liberty All-Star® Equity Fund	Schedule of Investments
	As of March 31, 2015 (Unaudited)

 

 

See Notes to Schedule of Investments.
First Quarter Report (Unaudited) | March 31, 2015	13

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Schedule of Investments	Liberty All-Star® Equity Fund
As of March 31, 2015 (Unaudited)

 

 

See Notes to Schedule of Investments.
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Security Valuation

Equity securities, including common stocks and exchange-traded funds are valued at the last sale price at the close of the principal exchange on which they trade, except for securities listed on the NASDAQ Stock Market LLC (“NASDAQ”), which are valued at the NASDAQ official closing price. Unlisted securities or listed securities for which there were no sales during the day are valued at the closing bid price on such exchanges or over-the-counter markets.

Cash collateral from securities lending activity is reinvested in the State Street Navigator Securities Lending Prime Portfolio, a registered investment company under the Investment Company Act of 1940 (the “1940 Act”), which operates as a money market fund in compliance with Rule 2a-7 under the 1940 Act. Shares of registered investment companies are valued daily at that investment company’s net asset value per share. Repurchase agreements are valued at cost, which approximates fair value.

The Fund’s investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value according to procedures adopted by the Fund's Board of Trustees (the "Board"). When market quotations are not readily available, or in management’s judgment they do not accurately reflect fair value of a security, or an event occurs after the market close but before the Fund is priced that materially affects the value of a security, the securities will be valued by the Adviser, ALPS Advisors, Inc. using fair valuation procedures established by the Board. Examples of potentially significant events that could materially impact a Fund’s net asset value include, but are not limited to: single issuer events such as corporate actions, reorganizations, mergers, spin-offs, liquidations, acquisitions and buyouts; corporate announcements on earnings or product offerings; regulatory news; and litigation and multiple issuer events such as governmental actions; natural disasters or armed conflicts that affect a country or a region; or significant market fluctuations. Potential significant events are monitored by the Adviser and/or Valuation Committee through independent reviews of market indicators, general news sources and communications from the Fund’s custodian.

Foreign Securities

The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible reevaluation of currencies, the inability to repatriate foreign currency, less complete financial information about companies and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers. For the period ended March 31, 2015, the Fund only held American Depositary Receipts and did not hold any securities denominated in foreign currencies.

Security Transactions

Security transactions are recorded on trade date. Cost is determined and gains/(losses) are based upon the specific identification method for both financial statement and federal income tax purposes.

Income Recognition

Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date.

 

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Notes to Schedule of Investments	Liberty All-Star® Equity Fund
March 31, 2015 (Unaudited)

 

The Fund estimates components of distributions from real estate investment trusts (“REITs”). Distributions received in excess of income are recorded as a reduction of the cost of the related investments. Once the REIT reports annually the tax character of its distributions, the Fund revises its estimates. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains.

Repurchase Agreements

The Fund engages in repurchase agreement transactions with institutions that the Fund’s investment advisor has determined are creditworthy. The Fund, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation, including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. These risks include possible delays or restrictions upon a Fund’s ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Fund seeks to assert its rights. These collateral agreements mitigate the counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.

Repurchase agreements are entered into by the Fund under a Master Repurchase Agreement (“MRA”) which permits the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due or from the Fund.

Lending of Portfolio Securities

The Fund may lend its portfolio securities only to borrowers that are approved by the Fund’s securities lending agent, State Street Bank & Trust Co. (“SSB”). The Fund will limit such lending to not more than 30% of the value of its total assets. The borrower pledges and maintains with the Fund collateral consisting of cash (U.S. Dollar only), securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, or by irrevocable bank letters of credit issued by a person other than the borrower or an affiliate of the borrower. The initial collateral received by the Fund is required to have a value of no less than 102% of the market value of the loaned securities for securities traded on U.S. exchanges and a value of no less than 105% of the market value for all other securities. The collateral is maintained thereafter, at a market value equal to no less than 100% of the current value of the securities on loan. The market value of the loaned securities is determined at the close of each business day and any additional required collateral is delivered to the Fund on the next business day. During the term of the loan, the Fund is entitled to all distributions made on or in respect of the loaned securities. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions.

Any cash collateral received is reinvested in a money market fund managed by SSB as disclosed in the Fund’s Schedule of Investments. Non-cash collateral, in the form of securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, is not disclosed in the Fund’s Schedule of Investments as it is held by the lending agent on behalf of the Fund, and the Fund does not have the ability to re-hypothecate these securities. As of March 31, 2015, the market value of securities on loan was $27,675,402, and the total cash collateral and non-cash collateral received was $21,371,894 and $7,600,078, respectively.

 

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The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate these risks, the Fund benefits from a borrower default indemnity provided by SSB. SSB’s indemnity allows for full replacement of securities lent. However, the Fund could suffer a loss if the value of the investments purchased with cash collateral falls below the value of the cash collateral received.

Fair Value Measurements

The Fund discloses the classification of its fair value measurements following a three-tier hierarchy based on the inputs used to measure fair value. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.

Valuation techniques used to value the Fund’s investments by major category are as follows:

Equity securities, exchange-traded funds and registered investment companies are categorized as Level 1 in the hierarchy. In the event there were no sales during the day or closing prices are not available, securities are valued at the mean of the most recent quoted bid and ask prices on such day and are generally categorized as Level 2 in the hierarchy. Repurchase agreements are valued at cost, which approximates fair value, and are categorized as Level 2 in the hierarchy.

Various inputs are used in determining the value of the Fund’s investments as of the end of the reporting period. When inputs used fall into different levels of the fair value hierarchy, the level in the hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The designated input levels are not necessarily an indication of the risk or liquidity associated with these investments.

These inputs are categorized in the following hierarchy under applicable financial accounting standards:

 

 

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The following is a summary of the inputs used to value the Fund’s investments as of March 31, 2015:

 

The Fund recognizes transfers between levels as of the end of the period. For the period ended March 31, 2015, the Fund did not have any transfers between Level 1 and Level 2 securities. The Fund did not havse any securities which used significant unobservable inputs (Level 3) in determining fair value during the period.

Indemnification

In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnities. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims against the Fund. Also, under the Fund’s organizational documents and by contract, the Trustees and Officers of the Fund are indemnified against certain liabilities that may arise out of their duties to the Fund. However, based on experience, the Fund expects the risk of loss due to these warranties and indemnities to be minimal.

 

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Liberty All-Star® Equity Fund	Description of Lipper Benchmark And Market Indicies
	March 31, 2015 (Unaudited)

Dow Jones Industrial Average

A price-weighted measure of 30 U.S. blue-chip companies.

Lipper Large-Cap Core Mutual Fund Average

The average of funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) above Lipper’s U.S. domestic equity large-cap floor. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500^® Index.

NASDAQ Composite Index

Measures all NASDAQ domestic and international based common type stocks listed on the NASDAQ Stock Market.

Russell 1000^® Growth Index

Measures the performance of those Russell 1000^® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000^® Index measures the performance of the 1,000 largest companies in the Russell 3000^® Index. The Russell 3000^® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Russell 1000^® Value Index

Measures the performance of those Russell 1000^® companies with lower price-to-book ratios and lower expected growth values.

S&P 500^® Index

A large cap U.S. equities index that includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

An investor cannot invest directly in an index.

 

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