[LOGO] ALL STAR EQUITY FUND -SM-
[GRAPHIC OF STAR]
ANNUAL REPORT 2000
LIBERTY ALL-STAR EQUITY FUND
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A SINGLE INVESTMENT...
A DIVERSIFIED 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
- A quarterly fixed distribution policy
- The power of more than $1.3 billion in assets
- Listing on the New York Stock Exchange
(ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
[GRAPHIC OF NUMBERS]
PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS: FEBRUARY 2001
Despite difficulties in the stock market during 2000, I am pleased to report
that Liberty All-Star Equity Fund turned in a very strong year - outperforming
both the Lipper Growth and Income Mutual Fund Average and the S&P 500 Index in
all four quarters and substantially surpassing both for the full year. The
following tables summarize key performance data for the fourth quarter and full
year 2000, as well as for 3-, 5- and 10-year periods.
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FUND FACTS AND SHORT-TERM PERFORMANCE
PERIODS ENDING DECEMBER 31, 2000 4TH QUARTER YEAR
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LIBERTY ALL-STAR EQUITY FUND
Year End Net Asset Value (NAV) ..................................................................... $13.61
Year End Market Price .............................................................................. $12.375
Year End Discount .................................................................................. 9.1%
Dividends Paid .......................................... $0.36 $1.42
Market Price Trading Range .............................. $11.3125 to $13.25 $9.75 to $13.25
Discount Range .......................................... 11.5% to 4.2% 24.4% to 4.2%
Shares Valued at NAV .................................... (1.7)% 7.5%
Shares Valued at NAV with Dividends Reinvested .......... (1.8)% 8.8%
Shares Valued at Market Price with Dividends Reinvested . (3.0)% 25.4%
Lipper Growth and Income Mutual Fund Average ............ (2.1)% 0.7%
S&P 500 Index ........................................... (7.8)% (9.1)%
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LONG-TERM PERFORMANCE SUMMARY ANNUALIZED RATES OF RETURN
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PERIODS ENDING DECEMBER 31, 2000 3 YEAR 5 YEAR 10 YEAR
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LIBERTY ALL-STAR EQUITY FUND
Shares Valued at NAV ........................................ 12.1% 16.7% 16.4%
Shares Valued at NAV with Dividends Reinvested .............. 12.8 17.2 16.7
Shares Valued at Market Price with Dividends Reinvested ..... 9.3 15.3 17.2
Lipper Growth and Income Mutual Fund Average ................ 9.4 15.0 15.1
S&P 500 Index ............................................... 12.3 18.3 17.5
Figures shown for the Fund and the Lipper Growth and Income 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.
Two thousand was an unprecedented year. Many investors may believe that
statement refers to the record decline in the Nasdaq Composite, or to the end of
a five-year period when the S&P 500 provided double digit returns. In fact, both
of those did occur in 2000. However, I am referring to the historically wide
difference in performance and volatility between value and growth stocks.
To illustrate, let us focus on the Russell 1000 Value Index and the Russell
1000 Growth Index. Never before has there been a double digit difference in
monthly performance between these two large capitalization indices. Yet, in
2000, it occurred not once, but four times. The bar chart on the following page
illustrates this phenomenon.
ALL-STAR EQUITY FUND 1
PRESIDENT'S LETTER
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Note that growth outperformed value by 12.3 percent in February and 12.2 percent
in June; then, observe the rotation that occurred as value outperformed growth
in five of the remaining six months of the year, highlighted by a 10.4 percent
difference in September and an 11.0 percent difference in November.
By the time the year was over, value outperformed growth for the year by
29.4 percent. In fact, the difference between these style indices on a monthly,
quarterly and annual basis was unprecedented in the history of those indices,
which date back to 1979.
[BAR GRAPH]
RUSSELL LARGE CAP VALUE INDEX VERSUS GROWTH INDEX
2000 RELATIVE MONTHLY AND ANNUAL PERFORMANCE
VALUE OUTPERFORMED
JAN. 1.4%
FEB. -12.3%
MAR. 5.0%
APR. 3.6%
MAY 6.1%
JUNE -12.2%
JULY 5.4%
AUG. -3.5
SEP. 10.4%
OCT. 7.2%
NOV. 11.0%
DEC. 8.2%
2000 29.4%
GROWTH OUTPERFORMED
The facts speak to the unusual year that 2000 was. But what of lessons for
individual investors? Above all, the constant changes in investor sentiment make
it clear that it was impossible to attempt to time the market. Shareholders have
only to look at the middle part of the bar chart to see how value and growth
seesawed every month during the May to September period. The other lesson is in
the major rotation away from growth stocks and toward value stocks. Even though
value outperformed growth in four of the first six months of the year, growth
actually outperformed value in both the first and second quarter. For the
remaining two quarters, however, value far surpassed growth - in the third
quarter by 12.3 percent and in the fourth quarter by 26.4 percent.
The lessons were particularly meaningful for All-Star Equity Fund
shareholders. To the first lesson about timing, our blending of styles enabled
the Fund to benefit from the rapid and unpredictable swings that occurred
throughout the year. To the second point, concerning the rotation to value from
growth, it was a perfect illustration of how styles go into and out of favor - a
point we have communicated consistently over the years - and a confirmation of
our approach to risk control.
I believe the year also serves as a validation of our disciplined approach
to investing. In fact, it was the kind of market environment in which our
multi-manager, multi-style investment strategy works best. Two thousand was the
exact
2 ALL-STAR EQUITY FUND
PRESIDENT'S LETTER
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opposite of 1999. During 1999, growth stocks - especially many of the large-cap
technology stocks - dominated the strong performance of the widely followed
benchmarks. For the Fund, this was a challenging environment. In 2000, the
market broadened significantly and rewarded good stock picking abilities, such
as our investment managers possess.
As a result, the Fund outperformed both the Lipper Growth and Income Mutual
Fund Average and the S&P 500 Index for all four quarters and for the year.
Moreover, relative to the S&P 500 Index, 2000 was the best year in the Fund's
history. For the full year, the Lipper benchmark advanced just 0.7 percent and
the S&P 500 declined 9.1 percent. By comparison, the Fund's NAV rose 7.5
percent; the Fund's NAV return with dividends reinvested rose 8.8 percent; and
Fund shares valued at market price gained 25.4 percent, which contributed to a
significant narrowing of the discount to NAV during the year.
The longer term results are extremely positive and they demonstrate the
Fund's consistent above average results. This is apparent when you compare the
Fund's percentile ranking to Lipper, Inc.'s universe of open-end growth and
income funds. Liberty All-Star Equity Fund is in the top quartile of performance
for 1- and 3-year periods; for 5- and 10-year periods, the Fund ranks in the
26th and 27th percentile, respectively. Most telling is the Fund's 18th
percentile ranking since inception 15 years ago. We are pleased with these
results and the consistency of that record.
Before closing, let me turn to related matters of shareholder interest.
First, registered shareholders can now access their account through our transfer
agent, EquiServe, using the World Wide Web. For example, shareholders can access
information about share balances; view current market price and total investment
value; request and print various forms, including transfer of ownership; and
conduct transactions. Additional online services will be added in the near
future. Second, Liberty Asset Management Company (LAMCO) has recently published
an updated marketing brochure, which will be used to further increase awareness
and promote the merits of the closed-end funds that LAMCO advises. Shareholders
interested in receiving a copy can call 1-800-241-1850 or access the Fund's Web
site at www.all-starfunds.com.
In this Annual Report, I would like to call your attention to two special
features. The first is an article authored by the members of LAMCO's senior
management team. I believe shareholders will gain a deeper understanding of the
Fund by reading this article. In addition, we offer the insights of the Fund's
five investment managers in our annual Roundtable, beginning on page 10. I think
you'll find their comments interesting and informative.
On behalf of the entire LAMCO team, 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, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
ALL-STAR EQUITY FUND 3
A CLOSER LOOK AT LIBERTY ALL-STAR EQUITY FUND
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SENIOR MANAGEMENT OF THE FUND ADVISOR DISCUSSES THE FACTORS THAT MAKE THE
ALL-STAR EQUITY FUND UNIQUE
[PHOTO FROM LEFT ARE: MARK HALEY, BILL PARMENTIER AND CHRIS CARABELL]
IN THIS SPECIAL ARTICLE FOR THE 2000 ANNUAL REPORT, THE SENIOR MANAGEMENT OF
LIBERTY ASSET MANAGEMENT COMPANY (LAMCO) PROVIDES SHAREHOLDERS WITH AN IN-DEPTH
LOOK AT THE ALL-STAR EQUITY FUND, INCLUDING THE FACTORS THAT MAKE IT UNIQUE, ITS
LONG-TERM OBJECTIVES, SHAREHOLDER BENEFITS AND HOW THE FUND IS MANAGED. THE
THREE LAMCO EXECUTIVES WRITING FOR THIS SPECIAL SECTION ARE WILLIAM R.
PARMENTIER, JR., PRESIDENT AND CHIEF EXECUTIVE OFFICER; CHRISTOPHER S. CARABELL,
SENIOR VICE PRESIDENT - PRODUCT DEVELOPMENT; AND MARK T. HALEY, VICE PRESIDENT -
INVESTMENTS. IN BRIEF, THEIR BACKGROUNDS FOLLOW:
BILL PARMENTIER CAME TO LAMCO IN 1995 FROM THE GRUMMAN CORPORATION, WHERE HE WAS
CHIEF INVESTMENT OFFICER AND PRESIDENT OF GQ ASSET MANAGEMENT, INC. AT GRUMMAN,
HE WAS RESPONSIBLE FOR EMPLOYEE BENEFIT PLANS WITH COMBINED ASSETS OF $5
BILLION. HE IS A GRADUATE OF NEW YORK INSTITUTE OF TECHNOLOGY AND HOLDS AN
M.B.A. IN FINANCE FROM HOFSTRA UNIVERSITY.
CHRIS CARABELL: A SENIOR MEMBER OF THE INVESTMENT TEAM, HE CAME TO LAMCO IN 1996
FROM BARRA ROGERSCASEY, AN INSTITUTIONAL CONSULTING FIRM, WHERE HE WAS ASSOCIATE
DIRECTOR, U.S. EQUITY RESEARCH. PRIOR TO THAT, HE WAS DIRECTOR OF INVESTMENTS
FOR THE BOY SCOUTS OF AMERICA'S PENSION PLAN AND ENDOWMENT. HE IS A GRADUATE OF
BAYLOR UNIVERSITY AND HOLDS AN M.B.A. IN FINANCE FROM SOUTHERN METHODIST
UNIVERSITY.
MARK HALEY: RESPONSIBLE FOR MANAGER SELECTION/IDENTIFICATION, PERFORMANCE
EVALUATION/MONITORING AND PORTFOLIO STRUCTURE, HE CAME TO LIBERTY IN 1989 FROM
STATE STREET CORPORATION. HE IS A GRADUATE OF SAINT ANSELM COLLEGE AND HOLDS AN
M.B.A. FROM SUFFOLK UNIVERSITY.
4 ALL-STAR EQUITY FUND
A CLOSER LOOK AT LIBERTY ALL-STAR EQUITY FUND
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THE FUND ADVISOR STRESSES ALIGNMENT OF MANAGEMENT AND SHAREHOLDER INTERESTS
By William R. Parmentier, Jr.
[PHOTO OF WILLIAM R. PARMENTIER, JR.]
If there is any characteristic of Liberty Asset Management Company that should
be of paramount interest to shareholders it is our dedication to the proposition
of putting shareholders' interests first. Another way of stating it: we believe
we have achieved excellent alignment of shareholder and fund advisor interests,
and we are dedicated to maintaining it going forward.
Before going into this important topic in a little more depth, I should
make sure that we are on the same page when it comes to terms. The first
question to be asked and answered is, Who or what is Liberty Asset Management
Company, or LAMCO, as we abbreviate it? LAMCO was established in 1986, the same
year that the Liberty All-Star Equity Fund commenced operations. From a purely
definitional standpoint, LAMCO is the registered investment management company
responsible for managing the fund and its assets.
What we do 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. I like
to refer to this as "looking at the four Ps" . . . that is, we focus on each
firm's philosophy, process, people and performance. So, instead of looking for a
portfolio of stocks, we're looking for superior investment managers, but we're
delving as deeply as an investment management firm would if they were buying
"XYZ" stock.
In terms of shareholder benefit, that makes us a turnkey investment. That
is, we perform all the due diligence, research, selection and monitoring that an
individual investor would. The difference is we do it with the experience, skill
and expertise of professionals. That's not to say that individuals aren't
thoughtful, careful investors. It's simply that this is what we do for a living,
and we have years of experience, state-of-the-art analytical tools and ample
time to perform all the necessary due diligence.
I look at this as an ongoing extra layer of expertise that we provide our
shareholders. We pick managers for the fund and we analyze them on an ongoing
basis. We add value by selecting best of breed managers and replacing them when
necessary. This brings me back to the point about objectivity: 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. I think investors can take
comfort in that.
We are aligned with the investor and shareholder because if a manager is
not performing, then we're not performing. We have no vested interest in
retaining or keeping managers for any reason other than superior performance
relative to their style. Period. We're absolutely aligned with the shareholder.
We want the same thing the shareholder wants, and that's better long-term,
risk-adjusted returns than the average mutual fund. We are shareholders in the
Fund and a good part of our compensation is based on the performance of the
Fund. If the Fund does not perform well, we feel it as shareholders and as
employees. So, there's no question where our interests lie: with you.
ALL-STAR EQUITY FUND 5
A CLOSER LOOK AT LIBERTY ALL-STAR EQUITY FUND
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MULTI-MANAGEMENT IS EMBEDDED IN THE ALL-STAR APPROACH TO INVESTING
By Mark T. Haley
[PHOTO OF MARK T. HALEY]
Multi-management is fundamental to All-Star's investment approach and to LAMCO's
investment philosophy. It's the same investment approach and philosophy that is
practiced by major institutional investors, such as pension plans and endowment
funds. The big difference between All-Star and most mutual funds is that
All-Star is multi-managed. With most funds, a single manager or a team of
managers makes the investment decisions. With the All-Star Equity Fund, five
complementary investment managers make the decisions, each operating separately
from the others.
LAMCO has had a decade and a half of experience managing for individuals
using the multi-management philosophy and process. As you can see from our
backgrounds (summarized on page 4), the senior managers of LAMCO have in-depth
experience in both the institutional money management and mutual fund
industries, so we are well equipped to manage funds in a multi-management
environment.
We've more or less defined multi-management already, but to reiterate,
multi-management is an investment approach in which assets are allocated among
several different, but complementary investment managers. Although the
allocation could be disproportionate, the All-Star Equity Fund allocates its
assets on an approximately equal basis among the five investment managers: three
value managers and two growth managers. The most important point is that
multi-management is a disciplined way to invest for the long term.
The rationale for multi-management is diversification and, hence, risk
control. With All-Star, diversification is practiced at two levels. At the fund
level, we don't diversify by stock, we diversify by manager, or subadvisor
(LAMCO being the advisor). At the manager level, the investment managers
diversify their portfolios (while remaining true to their investment style and
strategy). It's interesting to note that subadvised and/or multi-managed funds
are growing rapidly in the mutual fund industry; some estimate that for the past
six years subadvised mutual funds have grown 6 percent a year faster than
internally managed funds. LAMCO recognized the value of this approach 15 years
ago.
In addition to diversification, multi-management using independent
subadvisors is highly objective. Out of thousands of investment managers, LAMCO
has a wide open playing field to choose those whom we believe, both
qualitatively and quantitatively, are superior investment managers.
The All-Star Equity Fund has a growth and income objective which balances
both growth and value style investing within the fund. We don't have a manager
picking both growth and value stocks because we feel that's an inefficient way
to blend the two styles. We believe that many good investment managers got to be
that way, in large part, because they practice a particular way of investing and
do so because that's what they truly believe is the best way to make money. So,
we don't try to force-fit growth and value through one manager, and that
differentiates us from the average growth and income fund.
Another point meriting attention is the recognition of sub-styles within
the overall value and growth styles. We define the differences in the managers'
sub-styles in the Manager Roundtable, which begins on page 10. The relevant
point for shareholders is that understanding the managers' specific sub-styles
allows us to do a superior job of portfolio construction. For instance, if all
three value managers were practicing value investing through the same sub-style,
we'd have a great deal of stock duplication within the fund. But, because of the
way the managers are blended, we are able to limit the number of stocks held by
more than one manager.
The benefits are reduced volatility and more consistent returns over the
long term.
6 ALL-STAR EQUITY FUND
A CLOSER LOOK AT LIBERTY ALL-STAR EQUITY FUND
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THE DISTRIBUTION POLICY IS ANOTHER ATTRIBUTE THAT MAKES ALL-STAR UNIQUE
By Christopher S. Carabell
[PHOTO OF CHRISTOPHER S. CARABELL]
Since 1988, the All-Star Equity Fund has had a policy of paying annual
distributions on its common shares totaling approximately 10 percent of the
fund's net asset value (NAV). The distributions are paid quarterly at a rate of
2.5 percent.
This distribution policy is among several attributes that distinguish
the All-Star Equity Fund. Two others are the fund's structure as a closed-end
mutual fund and its multi-management investment approach, the latter having
been discussed already. Actually, all three of these factors work together to
add value for shareholders.
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 traded 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 by the fund sponsor.
Why is All-Star a closed-end fund? Basically, because it 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. Our 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. As an
example, because there's a fixed shareholder base and, thus, fewer transactions,
transfer agency fees are lower.
Multi-management complements the payout policy because when LAMCO finds it
necessary to replace an investment manager a portion of the portfolio is turned
over (sold). This provides a systematic mechanism for distributing funds to
shareholders principally in the form of long-term capital gains, which are
generally taxed at a lower rate than ordinary income for most shareholders. This
helps to make the fund a tax efficient investment for most shareholders.
I should point out that All-Star has a highly 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. So, it's not like the fund is liquidating 10 percent of its
assets each year, because many shareholders let their dividends compound over
time through reinvestment.
Finally, the 10 percent distribution policy has the natural effect of
helping to narrow the discount at which All-Star trades to its NAV. The 10
percent distribution, 2.5 percent each quarter, is based on the NAV price. So,
if the stock exchange or market price compared to the NAV widens (i.e., the
discount gets bigger), the 10 percent payout based on the market price, which is
the price investors pay for a share of the fund, actually increases. Most
closed-end funds sell for an amount less than their NAV or at a discount to NAV
(while open-ended fund transactions are always at the current NAV). Shareholders
participating in the All-Star Fund Dividend Reinvestment Plan will always
benefit because their shares are reinvested at the lower of the market price or
NAV. Occasionally, a closed-end fund, such as All-Star, will sell for a premium
to its NAV, in other words, a situation in which the market price exceeds the
NAV.
ALL-STAR EQUITY FUND 7
WHY LAMCO PRACTICES MULTI-MANAGEMENT
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Most mutual funds are run by a single portfolio manager or an in-house team
of managers who pursue a particular investment style, whether it's growth or
value. But styles go in and out of favor. A style that produces strong returns
one year may produce disappointing results the next. That's a prescription for
increased volatility.
All-Star's Fund Manager, Liberty Asset Management Company (LAMCO), utilizes
multi-management, the same approach that is practiced by most large
institutions, such as pension and endowment funds. Rather than rely on a single
investment style, multi-management combines managers who practice different
investment styles to reduce volatility while producing attractive returns.
All-Star's long-term track record provides clear testimony to the value of
the multi-management strategy. As you can see from the chart below, since
All-Star's first full calendar year of operation 14 years ago, the Fund has
achieved better-than-average returns and better-than-average consistency
compared with other major open-end growth and income funds.
[ANNUAL RETURN GRAPHIC]
X-Axis Y-Axis
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5.22 14.73
7.37 12.62
3.59 13.59
6.78 13.56
5.06 10.09
5.80 11.69
3.76 12.22
5.56 13.39
4.76 15.37
4.00 16.92
12.32 8.68
4.07 15.71
3.81 15.03
5.09 14.53
3.16 12.40
2.98 15.25
6.09 12.90
8.37 14.86
8.15 14.83
5.28 14.40
6.64 12.81
8.53 10.41
6.24 14.61
8.15 11.15
5.09 12.65
5.00 13.28
3.90 14.69
6.60 11.09
5.97 13.71
4.75 15.00
5.55 12.90
7.44 8.49
6.32 16.52
4.99 13.20
6.14 12.93
7.74 15.47
5.81 15.14
8.73 13.53
6.79 14.48
6.45 14.61
3.85 15.13
5.95 13.49
All-Star's high return and high consistency combination is well-placed
among the universe of major open-end growth and income funds.
Each dot represents the precise 14-year return and consistency record
ending December 31, 2000, of one fund in the universe of 40 open-end growth and
income equity mutual funds (as listed by both Morningstar, Inc. and Lipper,
Inc.) that had at least $100 million in assets at the beginning of the 14-year
period.
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 ALL-STAR EQUITY FUND
HOW LAMCO PRACTICES MULTI-MANAGEMENT
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[PIE CHART]
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.
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.
WESTWOOD MANAGEMENT CORPORATION
VALUE/Companies selling at reasonable valuations based on the firm's earnings
projections, which are not yet reflected in consensus estimates.
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' styles.
LAMCO conducts continuing evaluation of the investment managers. The
purpose is 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 from inception in 1986 through 2000.
ALL-STAR EQUITY FUND 9
MANAGER ROUNDTABLE
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2000 CONFIRMED THAT VALUATIONS, EARNINGS, INFLATION AND INTEREST RATES REALLY DO
COUNT. NOW, IT'S POSSIBLE FOR THOSE VERY SAME FACTORS THAT DROVE THE MARKET DOWN
TO REVIVE IT.
THE WORLD SURVIVED THE FIRST YEAR OF THE NEW MILLENNIUM, BUT NOT THE STOCK
MARKET. HIGHER INTEREST RATES, SOARING ENERGY COSTS, OVEREXTENDED VALUATIONS,
SLOWING EARNINGS GROWTH AND OVEREXUBERANCE FINALLY ROPED THE MIGHTY BULL. AFTER
LABOR DAY, IT TURNED INTO A ROUT FOR TECHS AND THE DOT-COMS - BUT NOT FOR STOCKS
MEETING TRADITIONAL VALUE METRICS. HOW DID IT HAPPEN? WHAT'S THE LESSON LEARNED?
AND WHERE DO WE GO FROM HERE?
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THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGERS' VIEWS AT THE TIME
OF THE DISCUSSION (JANUARY 2001) AND ARE SUBJECT TO CHANGE.
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If ever there was a year when diversification was rewarded, it was 2000. The
All-Star Equity Fund's balance of value and growth style investment managers
enabled the fund to outperform all comparable benchmarks. In comparison to the
most widely-watched market measures, the Fund topped the S&P 500 Index, the
Nasdaq Composite and the Dow Jones Industrial Average.
Still, it was a year in which few investors could find solace. And that
makes it a period of time that should be analyzed for the lessons one can store
away for future reference. For a look at what happened in 2000 and why, as well
as what lessons investors should take away and where we might be going from
here, All-Star's five investment managers offer their best insights in this 2000
Annual Report Roundtable. The managers review the year past, analyze the
investment environment and offer a comment on the future - all from the
perspective of their specific investment styles and philosophies. 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
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
five-year 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-
10 ALL-STAR EQUITY FUND
MANAGER ROUNDTABLE
--------------------------------------------------------------------------------
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
characteristics include higher return on equity, higher forecasted 12-month
growth rates and lower forecasted price-to-earnings ratios than the market.
LAMCO: After a hopeful start, 2000 turned out to be more of a minefield than a
millennium. What's your perspective on the year, and what lessons should
investors take away from it? Susan Byrne, let's ask you to open the discussion.
BYRNE (WESTWOOD - VALUE): The millennium minefield provided lessons in financial
fundamentals, as witnessed in the technology sector. When the selling began in
the technology sector early in 2000, investors turned their focus to technology
companies that were generating positive earnings per share. It was no longer
enough to have an exciting business plan. The market favored companies that were
able to turn an exciting business plan into a company that would generate
positive earnings per share. Profitable companies trading at record high
valuations remained the darlings of the market. However, an end to these high
valuations came at the hands of the Federal Reserve, whose three interest rate
tightenings during the year totaled 100 basis points. The Fed's monetary policy
resulted in weaker corporate earnings growth and negative earnings surprises,
which caught investors by surprise. Afterwards, investors refused to support the
high valuations at which many of the profitable technology companies were
trading. As a result of technology's slide from popularity, many tech stocks are
now on value managers' radar screens, demonstrating the drastic decline in
valuations.
LAMCO: Thank you. Let's hear from a growth manager. Glen Bickerstaff, share your
thoughts with us, please.
BICKERSTAFF (TCW - GROWTH): We cautioned from the beginning of the year that
higher economic rents in the form of higher interest rates and energy prices
would create a challenge for some companies and, indeed, they did. A key lesson
for the year should be that stocks are valued based on expectations and
perceptions. As the economy showed incredible strength at the beginning of the
year some extrapolated that the good times might never end. While we have always
been careful on valuation it was equally important in 2000 to be aware of the
indications that a slowdown was materializing.
LAMCO: Let's hear from another growth manager and welcome Frank Mastrapasqua to
his first Roundtable. Frank, what are your thoughts?
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): A year ago, our investment
strategy was based on a number of underlying assumptions. They were:
- Y2K would not be substantially disruptive to world and U.S. economic growth
- The post-new year's celebration would herald capital spending returning to the
Internet, with telecommunications a priority
- High flying "dot-com" corporate entities represented high risk
- Health care developments would be driven by genomics and proteomics research
- Overall economic growth would continue to be stimulated by accelerating
productivity gains from expanded corporate Internet applications
- Fiscal policy would not be a significant variable
- Nominal and real interest rates would not curtail economic growth
- Finally, the Presidential election would be resolved by November 7, 2000
The first six assumptions developed as expected, while the seventh and eighth
proved problematic. The year 2000 ended on a stressful note. Nasdaq valuations
slid more than 50 percent from intra-year highs, with the downturn triggered by
companies signaling weakening demand and earnings. Sluggish automobile sales
spread to consumer durables, personal computers,
[SIDENOTE]
"A KEY LESSON FOR THE YEAR SHOULD BE THAT STOCKS ARE VALUED BASED ON
EXPECTATIONS AND PERCEPTIONS."
GLEN BICKERSTAFF, TCW (GROWTH)
[SIDENOTE]
"AS A RESULT OF TECHNOLOGY'S SLIDE FROM POPULARITY, MANY TECH STOCKS ARE NOW ON
VALUE MANAGERS' RADAR SCREENS, DEMONSTRATING THE DRASTIC DECLINE IN VALUATIONS."
SUSAN BYRNE, WESTWOOD MANAGEMENT (VALUE)
ALL-STAR EQUITY FUND 11
MANAGER ROUNDTABLE
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semiconductors, outsourcing companies and mature telecommunications companies.
The market behavior has made investors fear that continued high nominal and
real interest rates would translate into profit contraction and a recession in
2001. Money growth has not been sufficient to support continued 4 to 6 percent
economic expansion.
LAMCO: Thank you. Now, let's turn to the other value managers. John Lindenthal
and Mark Donovan, share your thoughts, please.
LINDENTHAL (OPPENHEIMER - VALUE): The perspective on 2000 is that because of
concerns about Y2K in the latter part of 1999, the Federal Reserve allowed money
to grow extremely fast, and together with the hype around the Internet, that
created a huge bubble in the technology and telecom sectors. The bubble has now
burst and the non-technology/telecom portion of the equity market has broadened
out nicely. The lesson is that valuation does matter.
DONOVAN (BOSTON PARTNERS - VALUE): The most remarkable feature of the year 2000
or, more specifically, the final nine months of the year, was that it was a
nearly perfect mirror image of the period from October 1998 through March 2000.
Prior to March 2000, valuation was not only meaningless, it was detrimental to
one's investment performance to have a valuation discipline in the buying or
selling of stocks. In the post-March period, valuation was of critical
importance. Prior to March 2000, the performance of small and medium
capitalization stocks was dwarfed by large cap stocks (and particularly by the
largest companies). More recently, good investment opportunities were far more
abundant among small and medium capitalization issues.
In our view, the most important investor lesson from the year 2000 was the
age-old notion of paying attention to risk in making investment decisions.
During the euphoria of the past few years, the definition of "risk" within the
equity markets took on a new meaning. Investors began to view a "risky"
portfolio as one that was underexposed to the highflying speculative issues that
were leading the market. Following the Nasdaq meltdown of 2000, investors
learned that the age-old definition of risk centered around preservation of
capital is a critically important component of one's investment philosophy.
LAMCO: Thank you, all. Now, the question on investors' minds is how long the
slump will last, i.e., when the market will turn. We won't ask you to forecast
the future, but we would like you to comment generally on your own economic and
market outlook for the next 12 months - either pro or con. Mark Donovan, why
don't we stay with you?
DONOVAN (BOSTON PARTNERS - VALUE): The dramatic decision by the Federal Reserve
on the second business day of 2001 to lower the federal funds rate by 50 basis
points gives investors a potential source of optimism for the year ahead. This
move signals that the central bank is willing to move quickly and decisively to
inject liquidity into an economy that looks to be softening. There are, however,
two key hurdles that we see to a more favorable backdrop for the equity market.
One is earnings. We began to see a rising level of disappointing corporate
earnings in the third quarter of 2000. December saw a high level of
pre-announcements of earnings shortfalls for the fourth quarter, suggesting that
the prior quarter's weakness was not a one-time event. We suspect that this
period of declining earning expectations will continue through at least the
middle of 2001, if not the entire year. The second cause for concern is
valuation. Even after the sell-off of 2000, most valuation metrics for the
market (e.g. price-to-earnings, price-to-cash-flow, price-to-book) are closer to
historic highs than to lows. Our judgment is that the speculative excesses built
up prior to March 2000 have not yet been fully worked off.
[SIDENOTE]
"THE BUBBLE HAS NOW BURST AND THE NON-TECHNOLOGY/ TELECOM PORTION OF THE EQUITY
MARKET HAS BROADENED OUT NICELY. THE LESSON IS THAT VALUATION DOES MATTER."
JOHN LINDENTHAL,
OPPENHEIMER (VALUE)
[SIDENOTE]
"PRIOR TO MARCH 2000, THE PERFORMANCE OF SMALL AND MEDIUM CAPITALIZATION STOCKS
WAS DWARFED BY LARGE CAP STOCKS...MORE RECENTLY, GOOD INVESTMENT OPPORTUNITIES
WERE FAR MORE ABUNDANT AMONG SMALL AND MEDIUM CAPITALIZATION ISSUES."
MARK DONOVAN,
BOSTON PARTNERS (VALUE)
12 ALL-STAR EQUITY FUND
MANAGER ROUNDTABLE
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LAMCO: John Lindenthal and Susan Byrne, what are your thoughts about overall
direction?
LINDENTHAL (OPPENHEIMER - VALUE): The overall market should offer positive
returns this year because valuation is better and the Federal Reserve is in a
position to add liquidity to the financial system. However, the market is split
between the technology-driven Nasdaq and the rest of the market. Technology
spending may turn up in the second half of 2001, so it could take awhile for the
Nasdaq to turn around.
BYRNE (WESTWOOD - VALUE): Economic activity in the U.S. is expected to slow in
2001 as a result of deteriorating consumer confidence and diminishing capital
expenditures. Westwood anticipates rest-of-world growth to outpace domestic
growth, with respective forecasted GDPs of approximately 3 percent and 2.5
percent. As the rest-of-world growth outpaces domestic growth, we expect to
derive returns from multinational companies, most notably in the form of a
recovery in the euro. We anticipate incremental decreases in the Fed funds rate
following the inter-meeting decrease on January 3. Slowing economic growth will
result in substantially less pricing power, as relief from the Fed's recent
easing will lag the effects on demand of previous policy tightenings. We expect
modest inflationary pressures, as productivity gains fail to offset rising labor
costs. An impending squeeze in corporations' operating margins will be the
likely result of higher production costs. While we expect energy prices to
remain high, consumers can expect some relief as energy prices moderately
decline.
LAMCO: What is your perspective, Frank Mastrapasqua?
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH): The good news is that the
landscape appears to be changing. We believe the Federal Reserve has recognized
that the Internet is transforming the way business works in fundamentally
positive ways. The Fed on December 19, 2000, switched to an accommodative
monetary bias. On January 3, 2001, the Fed cut interest rates by 50 basis
points. Fiscal stimulus, through potential tax reductions next year, would be an
additional positive step.
The first tangible glimpse of 2001 market and economic prospects will come
early in 2001 when corporations report fourth quarter earnings and disclose
business trends and expectations. The realigned earnings picture will be
overlaid with the Fed's January 3 rate cut, which was, hopefully, the first in a
series of reductions.
Conceivably, we are destined to suffer through a contracting economy.
Although a small risk exists that the Fed may still move too slowly, there is
evidence that a more accommodative monetary policy is here. Multiple interest
rate reductions will stimulate business activity. Fiscal stimulus is also likely
to occur, with magnitude and timing the only uncertainties.
LAMCO: What is your perspective, Glen Bickerstaff?
BICKERSTAFF (TCW - GROWTH): Markets tend to over-discount information in both
directions. We expect there is more bad news ahead, but particularly for the
technology sector the markets have already discounted most of it. The slowing
economy may set in motion several structural forces that enable the economy to
re-expand and the stock market will, at some point, reflect the potential for
improvement. From a valuation standpoint, we think our holdings are quite
reasonably priced. Moreover we anticipate, given their business model advantage,
these companies will be able to gain share through the slowdown and come out of
it in far better shape than their competitors.
LAMCO: Is there a sector that you expect will replace technology as the market
leader for the next 12 to 24 months, or do you expect tech to resume leadership
at some point in 2001? What do the growth managers think about this? Frank
Mastrapasqua, your thoughts, please.
MASTRAPASQUA (MASTRAPASQUA & ASSOCIATES - GROWTH):
Technology/telecommunications, health care and e-value will provide market
leadership over
[SIDENOTE]
"CONCEIVABLY, WE ARE DESTINED TO SUFFER THROUGH A CONTRACTING ECONOMY. ALTHOUGH
A SMALL RISK EXISTS THAT THE FED MAY STILL MOVE TOO SLOWLY, THERE IS EVIDENCE
THAT A MORE ACCOMMODATIVE MONETARY POLICY IS HERE."
FRANK MASTRAPASQUA,
MASTRAPASQUA & ASSOCIATES (GROWTH)
[SIDENOTE]
"WE HAVE BEEN OVERWEIGHT IN FINANCIAL STOCKS SINCE THE EARLY '90'S AND WE STILL
BELIEVE THEY ARE THE BEST RELATIVE AND ABSOLUTE VALUES IN THE MARKETPLACE."
JOHN LINDENTHAL, OPPENHEIMER (VALUE)
ALL-STAR EQUITY FUND 13
MANAGER ROUNDTABLE
--------------------------------------------------------------------------------
the next 12 to 24 months. The e-value sector is made up of "old economy"
companies, most of which have not realized the full potential of Internet-based
technologies and the efficiencies that will result. Implementation of these
technologies will lift earnings of the companies in this sector to levels above
expectations.
Mature global communication systems were designed and developed to
accommodate analog voice traffic. Data traffic now exceeds voice and is growing
ten times faster per year. Hence, the scramble is on to simultaneously deliver a
modern voice/data system and accommodate prospective demand requirements. The
development of a new communications infrastructure rivals all previous capital
projects. The benefits will be lower communication costs and expanded
communication capability. In addition, accelerated medical breakthroughs,
specifically in genetics, will result in significant drug development and
delivery in 2001.
The foundation for non-inflationary and profitable economic growth in 2001
and beyond rests primarily upon the continued development of Internet- and
communications productivity-enhancing products, and genomics- and
proteomics-based life-advancing systems. The speeds with which these develop
depend upon the adequacy of enabling monetary policies, but the foundation has
been set.
BICKERSTAFF (TCW - GROWTH): In past recessions, the best performing sectors have
been financials, health care and technology. Financials benefit from attendant
interest rate declines. Health care spending is somewhat impervious to a decline
in discretionary consumer spending. And, companies tend to continue to spend on
technology, as it is critical to their being able to improve productivity and
cut costs. In the fourth quarter of 2000 financials and health care have already
markedly outperformed the broad market. Meanwhile, technology has dramatically
underperformed. On a relative valuation basis, we find each area attractive,
while the companies we own continue to have superior growth prospects.
LAMCO: Mark Donovan, how do you see things unfolding?
DONOVAN (BOSTON PARTNERS - VALUE): It seems highly unlikely that technology
could regain the kind of dominant leadership position that it held prior to
March 2000. To expect any other sector to take on that type of role is also
probably unrealistic. We do not believe that any one or two sectors stand out
right now as having vastly superior fundamentals or highly compelling
valuations. Therefore, we would expect that investment success in 2001 may well
be determined more by good stock selection within sectors as opposed to sector
allocations.
LAMCO: Susan Byrne, your views?
BYRNE (WESTWOOD - VALUE): In early 2000, we believe that dominance by the
technology sector came to an end. While certain technology companies should
recover as the capacity bubble created by Y2K excesses is worked out, we
continue to believe the S&P 500's weighting of 30 percent in the technology
sector represented a long-term peak. Technology outperformance was replaced by
outperformance in select energy and utility stocks. In 2001, earnings prospects
and modest valuations will allow select stocks in these sectors to continue to
perform well. In addition, we expect consumer and other export-related companies
to benefit from a weaker dollar, especially against the euro.
LAMCO: John Lindenthal, wrap things up, will you?
LINDENTHAL (OPPENHEIMER - VALUE): We have been overweight in financial stocks
since the early '90s and we still believe they are the best relative and
absolute values in the marketplace. Once the excess in technology spending has
worked through the system, investors will once again focus on this area. We have
started to increase our exposure, but only modestly at this point.
LAMCO: Many thanks to all of you for an interesting discussion
[SIDENOTE]
"IN PAST RECESSIONS, THE BEST PERFORMING SECTORS HAVE BEEN FINANCIALS, HEALTH
CARE AND TECHNOLOGY...ON A RELATIVE VALUATION BASIS, WE FIND EACH AREA
ATTRACTIVE..."
GLEN BICKERSTAFF, TCW (GROWTH)
[SIDENOTE]
"TECHNOLOGY/TELECOMMUNICATIONS, HEALTH CARE AND E-VALUE WILL PROVIDE MARKET
LEADERSHIP OVER THE NEXT 12 TO 24 MONTHS."
FRANK MASTRAPASQUA,
MASTRAPASQUA & ASSOCIATES (GROWTH)
14 ALL-STAR EQUITY FUND
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
--------------------------------------------------------------------------------
THE FUND'S FIVE INVESTMENT MANAGERS AND THE 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.
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.
INVESTMENT STYLE SPECTRUM
PORTFOLIO
CHARACTERISTICS
AS OF DECEMBER 31, 2000
(UNAUDITED)
VALUE GROWTH
Boston Oppen- Mastra- Total S&P
Partners heimer Westwood pasqua TCW Fund 500 Index
---------------------------------------------------------------------------------------------------------------------------------
Number of Holdings 39 30 43 44 28 152 500
---------------------------------------------------------------------------------------------------------------------------------
Percent of Holdings in Top 10 40% 56% 27% 31% 53% 18% 23%
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $30 $69 $53 $92 $85 $63 $112
---------------------------------------------------------------------------------------------------------------------------------
Average Five-Year
Earnings Per Share Growth 9% 16% 10% 18% 27% 16% 16%
---------------------------------------------------------------------------------------------------------------------------------
Dividend Yield 1.6% 1.3% 1.7% 0.5% 0.2% 1.1% 1.2%
---------------------------------------------------------------------------------------------------------------------------------
Price/Earnings Ratio 17x 19x 17x 32x 34x 21X 22x
---------------------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 3.8x 3.8x 3.7x 7.4x 7.1x 5.0X 5.7x
---------------------------------------------------------------------------------------------------------------------------------
ALL-STAR EQUITY FUND 15
INVESTMENT GROWTH AS OF DECEMBER 31, 2000
--------------------------------------------------------------------------------
[LINE GRAPH]
INCLUDES ADDITIONAL
NET ASSET VALUE NET ASSET VALUE PER INVESTMENTS
PER SHARE PLUS SHARE ACQUIRED THROUGH MADE THROUGH
DISTRIBUTIONS PAID DISTRIBUTIONS REINVESTMENT RIGHTS OFFERING
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 $11.80 $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 $9.90 $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 $14.30 $14.30
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 $14.00 $14.00
31-Jan-91 $13.04 $14.71 $14.71
28-Feb-91 $13.71 $15.76 $15.76
31-Mar-91 $14.10 $16.41 $16.41
30-Apr-91 $14.03 $16.30 $16.30
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 $19.50 $19.50
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 $18.70 $20.58
30-Sep-92 $15.94 $19.63 $21.60
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 $20.60 $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 $23.90
30-Sep-93 $17.35 $22.38 $24.64
31-Oct-93 $17.40 $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 $17.20 $21.99 $25.68
31-May-94 $17.07 $21.71 $25.34
30-Jun-94 $17.00 $21.52 $25.12
31-Jul-94 $17.30 $22.20 $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 $17.50 $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 $27.00 $33.32
30-Sep-95 $19.82 $28.51 $35.17
31-Oct-95 $19.70 $28.20 $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 $39.00
31-May-96 $20.96 $31.53 $38.90
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 $21.80 $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 $37.60 $46.40
28-Feb-97 $22.91 $37.30 $46.03
31-Mar-97 $22.41 $35.79 $44.16
30-Apr-97 $22.87 $37.19 $45.90
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 $27.20 $51.19 $63.21
30-Apr-98 $27.33 $51.64 $63.77
31-May-98 $26.45 $48.60 $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 $61.60
30-Nov-98 $26.50 $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 $55.60 $71.41
30-Nov-99 $27.92 $54.70 $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 $56.40 $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 $83.40
30-Sep-00 $30.15 $65.25 $83.80
31-Oct-00 $30.33 $66.07 $84.86
30-Nov-00 $28.89 $59.48 $76.39
31-Dec-00 $29.87(1) $64.10(2) $82.33(2)
1. Net asset value (NAV) of one share of All-Star as of 12/31/00 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, 2000. 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 $29.87 (current NAV of $13.61 plus distributions paid since inception
totaling $16.26, 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 $64.10 (4.710 shares times the current NAV
of $13.61).
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 $82.33
(6.049 shares times the current NAV of $13.61).
16 ALL-STAR EQUITY FUND
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENT
--------------------------------------------------------------------------------
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
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, at 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.
ALL-STAR EQUITY FUND 17
TOP 50 HOLDINGS
--------------------------------------------------------------------------------
RANK AS RANK AS MARKET PERCENT OF
OF 12/31/00 OF 9/30/00 SECURITY NAME VALUE ($000) NET ASSETS
------------------------------------------------------------------------------------------------------------------------
1 1 Citigroup, Inc. $ 40,950 3.0%
2 70 Emerson Electric Co. 25,646 1.9
3 12 Countrywide Credit Industries, Inc. 23,597 1.7
4 6 The Progressive Corp. 23,285 1.7
5 3 Pharmacia Corp. 22,951 1.7
6 25 Minnesota Mining & Manufacturing Co. 22,015 1.6
7 7 AFLAC, Inc. 21,656 1.6
8 21 Freddie Mac 20,663 1.5
9 11 Avon Products, Inc. 19,547 1.4
10 New Bank of America Corp. 19,479 1.4
11 22 Pfizer, Inc. 18,507 1.3
12 33 Amgen, Inc. 18,107 1.3
13 16 XL Capital Ltd. 17,475 1.3
14 35 The Home Depot, Inc. 16,989 1.2
15 44 Genentech, Inc. 16,455 1.2
16 5 Intel Corp. 16,275 1.2
17 9 El Paso Energy Corp. 15,557 1.1
18 46 Morgan Stanley Dean Witter & Co. 15,454 1.1
19 26 The Boeing Co. 15,180 1.1
20 4 SBC Communications, Inc. 15,046 1.1
21 40 Wal-Mart Stores, Inc. 15,008 1.1
22 19 Baxter International, Inc. 14,898 1.1
23 32 Alcoa, Inc. 14,797 1.1
24 8 Cisco Systems, Inc. 14,371 1.0
25 41 UST, Inc. 14,346 1.0
26 50 Sprint Corp. (FON Group) 12,984 0.9
27 38 Allmerica Financial Corp. 12,659 0.9
28 28 CIGNA Corp. 12,502 0.9
29 18 Verizon Communications, Inc. 12,479 0.9
30 65 General Electric Co. 12,459 0.9
31 29 Stilwell Financial, Inc. 12,328 0.9
32 24 Paychex, Inc. 11,262 0.8
33 54 Biogen, Inc. 11,154 0.8
34 57 Wells Fargo & Co. 11,138 0.8
35 37 Harcourt General, Inc. 10,965 0.8
36 17 Nokia Corp. ADR 10,875 0.8
37 14 Maxim Integrated Products, Inc. 10,834 0.8
38 2 Siebel Systems, Inc. 10,826 0.8
39 30 The Charles Schwab Corp. 10,747 0.8
40 45 Bristol-Myers Squibb Co. 10,662 0.8
41 27 Dell Computer Corp. 10,410 0.8
42 36 Burlington Resources, Inc. 10,408 0.8
43 80 Kimberly-Clark Corp. 10,201 0.7
44 52 American International Group, Inc. 10,039 0.7
45 51 Clear Channel Communications, Inc. 9,809 0.7
46 84 JDS Uniphase Corp. 9,680 0.7
47 23 ACE Ltd. 9,599 0.7
48 15 Providian Financial Corp. 9,580 0.7
49 75 Applied Materials, Inc. 9,562 0.7
50 96 The Reader's Digest Association, Inc. 9,511 0.7
18 ALL-STAR EQUITY FUND
MAJOR STOCK CHANGES IN THE FOURTH QUARTER
-------------------------------------------------------------------------------
The following are the major ($5.0 million or more) stock changes--both purchases
and sales--that were made in the Fund's portfolio during the fourth quarter of
2000, not including changes resulting from the manager replacement of J.P.
Morgan Investment Management Inc., with Mastrapasqua & Associates effective
November 1, 2000.
SECURITY NAME PURCHASED (SOLD) SHARES AS OF 12/31/00
--------------------------------------------------------------------------------------------------
PURCHASES
Bank of America Corp. ................................ 424,600 424,600
Canadian Pacific, Ltd. ............................... 200,000 200,000
Emerson Electric Co. ................................. 100,400 325,400
General Electric Co. ................................. 109,200 259,900
Georgia-Pacific Group ................................ 250,700 250,700
JDS Uniphase Corp. ................................... 64,000 232,200
Johnson & Johnson .................................... 63,000 63,000
KeyCorp. ............................................. 339,600 273,600
Kroger Co. ........................................... 250,000 250,000
Lexmark International, Inc. .......................... 195,000 195,000
Merck & Co., Inc. .................................... 60,600 60,600
Microsoft Corp. ...................................... 106,900 197,800
Network Appliance, Inc. .............................. 73,300 73,300
Praxair, Inc. ........................................ 147,700 147,700
Sprint Corp. (FON Group) ............................. 299,200 639,200
SunTrust Banks, Inc. ................................. 118,800 118,800
Target Corp. ......................................... 230,100 227,200
3Com Corp. ........................................... 633,100 869,300
United Technologies Corp. ............................ 90,700 90,700
Weyerhaeuser Co. ..................................... 119,700 119,700
Xilinx, Inc. ......................................... 135,000 135,000
Yahoo!, Inc. ......................................... 104,900 104,900
SALES
Alcan Aluminum Ltd. .................................. (254,100) 0
AXA Financial, Inc. .................................. (212,900) 31,270
Baxter International, Inc. ........................... (116,900) 168,700
Burlington Northern Santa Fe Corp. ................... (200,000) 0
Caterpillar, Inc. .................................... (130,000) 0
Deere & Co. .......................................... (339,700) 151,400
Fannie Mae ........................................... (141,100) 71,800
Gillette Co. ......................................... (152,600) 0
Illinois Tool Works, Inc. ............................ (154,500) 0
Occidental Petroleum Corp. ........................... (400,100) 0
Providian Financial Corp. ............................ (57,900) 166,600
SBC Communications, Inc. ............................. (124,500) 315,100
TrizecHahn Corp. ..................................... (418,900) 0
ALL-STAR EQUITY FUND 19
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2000
COMMON STOCKS (97.4%) SHARES MARKET VALUE
---------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.6%)
The Boeing Co. ......................................... 230,000 $ 15,180,000
United Technologies Corp. .............................. 90,700 7,131,288
----------------
22,311,288
----------------
BANKS (6.2%)
Bank of America Corp. .................................. 424,600 19,478,525
The Bank of New York Co., Inc. ......................... 105,000 5,794,687
Chase Manhattan Bank. .................................. 164,750 7,485,828
Comerica, Inc. ......................................... 79,800 4,738,125
First Union Corp. ...................................... 283,800 7,893,188
FleetBoston Financial Corp. ............................ 170,000 6,385,625
KeyCorp. ............................................... 273,600 7,660,800
PNC Financial Services Group. .......................... 105,300 7,693,481
SunTrust Banks, Inc. ................................... 118,800 7,484,400
Wells Fargo & Co. ...................................... 200,000 11,137,500
----------------
85,752,159
----------------
BROADCASTING & CABLE (1.3%)
Cablevision Systems Corp. Class A (a) .................. 100,000 8,493,750
Clear Channel Communications, Inc. (a) ................. 202,508 9,808,981
----------------
18,302,731
----------------
BUSINESS & CONSUMER SERVICES (0.8%)
Paychex, Inc. ......................................... 231,612 11,262,134
----------------
CHEMICALS (0.5%)
Praxair, Inc. .......................................... 147,700 6,554,187
----------------
COMMUNICATIONS EQUIPMENT (2.4%)
Avaya, Inc. (a) ........................................ 158,300 1,632,469
Cisco Systems, Inc. (a) ................................ 375,700 14,370,525
Nokia Corp. (b) ........................................ 250,000 10,875,000
Nortel Networks Corp. .................................. 171,600 5,501,925
----------------
32,379,919
----------------
20 ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
------------------------------------------------------------------------------------------
COMPUTER & BUSINESS EQUIPMENT (4.7%)
Compaq Computer Corp. .................................. 457,300 $ 6,882,365
Dell Computer Corp. (a) ................................ 597,000 10,410,188
EMC Corp. (a) .......................................... 72,500 4,821,250
International Business Machines Corp. .................. 102,150 8,682,750
Lexmark International, Inc. (a) ........................ 195,000 8,640,938
NCR Corp. (a) .......................................... 91,100 4,475,287
Network Appliance, Inc. (a) ............................ 73,300 4,708,380
Sun Microsystems, Inc. (a) ............................. 144,200 4,019,575
3Com Corp. (a) ......................................... 869,300 7,389,050
VERITAS Software Corp. (a) ............................. 55,000 4,812,500
-------------
64,842,283
-------------
COMPUTER SERVICES & SOFTWARE (3.1%)
Electronic Data Systems Corp. .......................... 103,200 5,959,800
Microsoft Corp. (a) .................................... 197,800 8,604,300
Oracle Corp. (a) ....................................... 241,700 7,024,406
Parametric Technology Corp. (a) ........................ 474,600 6,377,438
Siebel Systems, Inc. (a) ............................... 159,800 10,826,450
Yahoo!, Inc. (a) ....................................... 104,900 3,165,030
-------------
41,957,424
-------------
CONSUMER PRODUCTS (3.8%)
Avon Products, Inc. .................................... 408,300 19,547,362
Kimberly-Clark Corp. ................................... 144,300 10,200,567
The Procter & Gamble Co. ............................... 110,900 8,698,719
UST, Inc. .............................................. 511,200 14,345,550
-------------
52,792,198
-------------
DIVERSIFIED (2.6%)
General Electric Co. ................................... 259,900 12,458,956
Honeywell International, Inc. .......................... 27,600 1,305,825
Minnesota Mining & Manufacturing Co. ................... 182,700 22,015,350
-------------
35,780,131
-------------
See Notes to Schedule of Investments. ALL-STAR EQUITY FUND 21
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------------
DRUGS & HEALTH CARE (13.7%)
Amgen, Inc. (a) ................................................ 283,200 $ 18,107,100
Applera Corp. - Applied Biosystems Group ....................... 50,000 4,703,125
Baxter International, Inc. ..................................... 168,700 14,898,319
Biogen, Inc. (a) ............................................... 185,700 11,153,606
Biovail Corp. (a) .............................................. 157,000 6,097,880
Boston Scientific Corp. (a) .................................... 332,300 4,548,356
Bristol-Myers Squibb Co. ....................................... 144,200 10,661,788
Cardinal Health, Inc. .......................................... 70,000 6,973,750
Elan Corp. PLC (a) (b) ......................................... 125,000 5,851,563
Forest Laboratories, Inc. (a) .................................. 50,000 6,643,750
Genentech, Inc. (a) ............................................ 201,900 16,454,850
IDEC Pharmaceuticals Corp. (a) ................................. 32,000 6,066,000
Invitrogen Corp. (a) ........................................... 75,000 6,478,125
Johnson & Johnson .............................................. 63,000 6,618,938
MedImmune, Inc. (a) ............................................ 90,000 4,291,875
Merck & Co., Inc. .............................................. 60,600 5,673,675
Pfizer, Inc. ................................................... 402,325 18,506,950
Pharmacia Corp. ................................................ 376,240 22,950,640
Protein Design Labs, Inc. (a) .................................. 45,000 3,909,375
Wellpoint Health Networks, Inc. (a) ............................ 67,900 7,825,475
--------------
188,415,140
--------------
ELECTRIC & GAS UTILITIES (2.4%)
Duke Energy Corp. .............................................. 82,600 7,041,650
Exelon Corp. ................................................... 115,000 8,074,150
NiSource, Inc. ................................................. 51,330 1,578,397
Progress Energy, Inc. .......................................... 168,610 8,293,505
Progress Energy, Inc. - Contingent Value Obligation (a) ........ 174,900 78,705
Reliant Energy, Inc. ........................................... 175,000 7,579,687
--------------
32,646,094
--------------
22 ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------------
ELECTRONICS & ELECTRICAL EQUIPMENT (7.9%)
Analog Devices, Inc. (a) ....................................... 80,000 $ 4,095,000
Applied Materials, Inc. (a) .................................... 250,400 9,562,150
Broadcom Corp. Class A (a) ..................................... 35,000 2,957,500
Emerson Electric Co. ........................................... 325,400 25,645,587
Intel Corp. .................................................... 538,000 16,274,500
JDS Uniphase Corp. (a) ......................................... 232,200 9,679,838
Maxim Integrated Products, Inc. (a) ............................ 226,600 10,834,313
PMC-Sierra, Inc. (a) ........................................... 45,000 3,538,125
Synopsys, Inc. (a) ............................................. 131,500 6,238,031
Texas Instruments, Inc. ........................................ 148,100 7,016,238
Waters Corp. (a) ............................................... 85,000 7,097,500
Xilinx, Inc. (a) ............................................... 135,000 6,226,875
--------------
109,165,657
--------------
FINANCIAL SERVICES (11.8%)
American Express Co. ........................................... 105,000 5,768,437
AXA Financial, Inc. (b) ........................................ 31,270 2,245,577
The Charles Schwab Corp. ....................................... 378,750 10,747,031
Citigroup, Inc. ................................................ 801,966 40,950,387
Countrywide Credit Industries, Inc. ............................ 469,600 23,597,400
Fannie Mae ..................................................... 71,800 6,228,650
Freddie Mac .................................................... 300,000 20,662,500
Lehman Brothers Holdings, Inc. ................................. 23,300 1,575,662
Merrill Lynch & Co., Inc. ...................................... 90,000 6,136,875
MetLife, Inc. (a) .............................................. 212,900 7,451,500
Morgan Stanley Dean Witter & Co. ............................... 195,000 15,453,750
Providian Financial Corp. ...................................... 166,600 9,579,500
Stilwell Financial, Inc. ....................................... 312,600 12,328,162
--------------
162,725,431
--------------
FOOD, BEVERAGE & RESTAURANTS (1.1%)
Anheuser-Busch Companies, Inc. ................................. 163,300 7,430,150
Heinz (H.J.) Co. ............................................... 160,900 7,632,694
--------------
15,062,844
--------------
See Notes to Schedule of Investments. ALL-STAR EQUITY FUND 23
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------------
FORESTRY & PAPER (1.0%)
Georgia-Pacific Group .......................................... 250,700 $ 7,803,038
Weyerhaeuser Co. ............................................... 119,700 6,074,775
--------------
13,877,813
--------------
HOTELS & ENTERTAINMENT/LEISURE (2.7%)
Carnival Corp. ................................................. 200,000 6,162,500
Pixar, Inc. (a) ................................................ 122,100 3,663,000
The Reader's Digest Association, Inc. .......................... 243,100 9,511,288
Starwood Hotels & Resorts Worldwide, Inc. ...................... 104,700 3,690,675
Time Warner, Inc. .............................................. 139,500 7,287,480
The Walt Disney Co. ............................................ 251,900 7,289,356
--------------
37,604,299
--------------
INDUSTRIAL EQUIPMENT (0.8%)
Deere & Co. .................................................... 151,400 6,936,013
Dover Corp. .................................................... 110,000 4,461,875
--------------
11,397,888
--------------
INSURANCE (9.2%)
ACE Ltd. ....................................................... 226,200 9,599,363
Aetna, Inc. (a) ................................................ 183,800 7,547,287
AFLAC, Inc. .................................................... 300,000 21,656,250
Allmerica Financial Corp. ...................................... 174,600 12,658,500
American International Group, Inc. ............................. 101,850 10,038,591
CIGNA Corp. .................................................... 94,500 12,502,350
The Hartford Financial Services Group, Inc. .................... 102,700 7,253,187
The Progressive Corp., Ohio .................................... 224,700 23,284,537
UnumProvident Corp. ............................................ 156,700 4,211,313
XL Capital Ltd. ................................................ 200,000 17,475,000
--------------
126,226,378
--------------
METALS & MINING (1.1%)
Alcoa, Inc. .................................................... 441,700 14,796,950
--------------
24 ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------------
OIL & GAS (6.8%)
Anadarko Petroleum Corp. ....................................... 101,900 $ 7,243,052
Apache Corp. ................................................... 106,800 7,482,675
Burlington Resources, Inc. ..................................... 206,100 10,408,050
Chevron Corp. .................................................. 50,000 4,221,875
Conoco, Inc. Class A ........................................... 170,000 4,866,250
Conoco, Inc. Class B ........................................... 281,500 8,145,906
Devon Energy Corp. ............................................. 122,179 7,449,254
El Paso Energy Corp. ........................................... 217,200 15,556,950
Exxon Mobil Corp. .............................................. 88,000 7,650,500
Halliburton Co. ................................................ 135,700 4,919,125
USX-Marathon Group ............................................. 303,100 8,411,025
The Williams Companies, Inc. ................................... 174,300 6,961,105
--------------
93,315,767
--------------
REAL ESTATE (0.4%)
Kimco Realty Corp. ............................................. 59,900 2,646,831
Vornado Realty Trust ........................................... 72,500 2,777,656
--------------
5,424,487
--------------
RETAIL TRADE (5.9%)
Costco Wholesale Corp. (a) ..................................... 82,000 3,274,875
Harcourt General, Inc. ......................................... 191,700 10,965,240
The Home Depot, Inc. ........................................... 371,850 16,988,897
The Kroger Co. (a) ............................................. 250,000 6,765,625
The Limited, Inc. .............................................. 339,600 5,794,425
May Department Stores Co. ...................................... 225,000 7,368,750
RadioShack Corp. ............................................... 100,000 4,281,250
Target Corp. ................................................... 227,200 7,327,200
Tiffany & Co. .................................................. 103,000 3,257,375
Wal-Mart Stores, Inc. .......................................... 282,500 15,007,813
--------------
81,031,450
--------------
See Notes to Schedule of Investments. ALL-STAR EQUITY FUND 25
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
-------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (3.2%)
QUALCOMM, Inc. (a) ............................................. 39,300 $ 3,229,969
SBC Communications, Inc. ....................................... 315,100 15,046,025
Sprint Corp. (FON Group) ....................................... 639,200 12,983,750
Verizon Communications ......................................... 248,954 12,478,819
--------------
43,738,563
--------------
TRANSPORTATION (2.4%)
AMR Corp. (a) .................................................. 180,000 7,053,750
Canadian Pacific, Ltd. ......................................... 200,000 5,712,500
Delta Air Lines, Inc. .......................................... 156,500 7,854,344
Southwest Airlines Co. ......................................... 169,300 5,676,629
United Parcel Service, Inc. Class B ............................ 123,500 7,263,344
--------------
33,560,567
--------------
TOTAL COMMON STOCKS (Cost $1,036,904,592) ...................... 1,340,923,782
--------------
PREFERRED STOCK (0.3%)
BROADCASTING & CABLE (0.3%)
The News Corp. Ltd. (b) (Cost $4,611,740) ...................... 150,000 4,359,375
--------------
26 ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
INTEREST MATURITY PAR
SHORT-TERM INVESTMENTS (4.6%) RATE DATE VALUE MARKET VALUE
-----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (1.2%)
American Express 6.45% 1/2/01 $8,000,000 $ 7,998,567
Ford Motor Credit Corp. 6.30 1/4/01 3,000,000 2,998,425
Household Finance 6.50 1/5/01 5,000,000 4,996,389
----------------
TOTAL COMMERCIAL PAPER (COST $15,993,381) .................................................... 15,993,381
----------------
REPURCHASE AGREEMENT (3.4%)
SBC Warburg Ltd., Repurchase Agreement dated 12/29/00,
6.00% to be repurchased at $46,537,004 on 01/02/01,
collateralized by U.S. Treasury bonds and/or notes with various maturities
to 2028, with a current market value of $47,397,171. .......................... 46,506,000 46,506,000
----------------
TOTAL SHORT-TERM INVESTMENTS (COST $62,499,381) .............................................. 62,499,381
----------------
TOTAL INVESTMENTS (102.3%) (COST $1,104,015,713) (c) ......................................... 1,407,782,538
----------------
OTHER ASSETS AND LIABILITIES, NET (-2.3%) .................................................... (31,609,825)
----------------
NET ASSETS (100.0%) .......................................................................... $1,376,172,713
----------------
----------------
NET ASSET VALUE PER SHARE (101,113,522 SHARES OUTSTANDING) ................................... $13.61
----------------
----------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Cost for federal income tax purposes is $1,109,005,384.
Gross unrealized appreciation and depreciation of investments at
December 31, 2000 is as follows:
Gross unrealized appreciation $387,229,538
Gross unrealized depreciation (88,452,384)
------------
Net unrealized appreciation $298,777,154
------------
------------
See Notes to Financial Statements. ALL-STAR EQUITY FUND 27
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2000
-----------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at market value (identified cost $1,104,015,713) ........................... $1,407,782,538
Receivable for investments sold ........................................................ 4,643,931
Dividends and interest receivable ...................................................... 809,500
Other assets ........................................................................... 53,171
--------------
TOTAL ASSETS .................................................................... 1,413,289,140
--------------
LIABILITIES:
Payable due to custodian bank .......................................................... 2,425
Payable for investments purchased ...................................................... 19,155,523
Distributions payable to shareholders .................................................. 16,553,604
Management, administrative and bookkeeping fees payable ................................ 1,019,089
Accrued expenses ....................................................................... 373,961
Other liabilities ...................................................................... 11,825
--------------
TOTAL LIABILITIES ............................................................... 37,116,427
--------------
NET ASSETS .................................................................................. $1,376,172,713
--------------
--------------
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized, 101,113,522 shares outstanding) ............................ $ 980,864,627
Accumulated net realized gains on investments
less distributions ....................................................................... 91,541,261
Net unrealized appreciation on investments ................................................ 303,766,825
--------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($13.61 PER SHARE) ................................................... $1,376,172,713
--------------
--------------
28 ALL-STAR EQUITY FUND See Notes to Financial Statements.
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends ................................................................................ $ 16,137,964
Interest ................................................................................. 2,414,223
-------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $38,636) ................................... 18,552,187
EXPENSES:
Management fees .............................................. $ 9,804,500
Administrative fee ........................................... 2,451,561
Bookkeeping fee .............................................. 283,483
Custodian and transfer agent fees ............................ 274,778
Proxy and shareholder communication expense .................. 181,692
Printing expense ............................................. 172,096
Legal and audit fees ......................................... 58,296
Trustees' fees and expense ................................... 83,920
NYSE fees .................................................... 86,536
Miscellaneous expense ........................................ 26,903
-----------------
TOTAL EXPENSES .................................................................... 13,423,765
-------------
NET INVESTMENT INCOME ......................................................................... 5,128,422
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investment transactions:
Proceeds from sales .......................................... 1,250,026,665
Cost of investments sold ..................................... 1,082,915,951
-----------------
Net realized gains on investment transactions ....................................... 167,110,714
Net unrealized appreciation on investments:
Beginning of year ............................................ 373,928,811
End of year .................................................. 303,766,825
-----------------
Change in unrealized appreciation-net ............................................. (70,161,986)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................................... $102,077,150
-------------
-------------
See Notes to Financial Statements. ALL-STAR EQUITY FUND 29
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------
STATEMENT OF CHANGES IN NET ASSETS 2000 1999
----------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income .......................................... $ 5,128,422 $ 5,017,012
Net realized gains on investment transactions .................. 167,110,714 157,250,175
Change in unrealized appreciation--net ......................... (70,161,986) (38,966,121)
---------------- ---------------
Net increase in net assets resulting from operations ........... 102,077,150 123,301,066
---------------- ---------------
DISTRIBUTIONS DECLARED FROM:
Net investment income .......................................... (5,712,380) (4,396,010)
Net realized gains on investments .............................. (135,687,387) (129,123,874)
---------------- ---------------
Total distributions ............................................ (141,399,767) (133,519,884)
---------------- ---------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions ......... 19,294,351 55,329,487
---------------- ---------------
Total increase (decrease) in net assets ........................ (20,028,266) 45,110,669
NET ASSETS:
Beginning of year .............................................. 1,396,200,979 1,351,090,310
---------------- ---------------
End of year .................................................... $ 1,376,172,713 $1,396,200,979
================ ==============
Undistributed net investment income ............................ $ -- $ 583,958
---------------- ---------------
30 ALL-STAR EQUITY FUND See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year .......... $14.02 $14.22 $13.32 $11.95 $11.03
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (a) ............... 0.05 0.05 0.05 0.05 0.08
Net realized and unrealized gains
(losses) on investments ............. 0.96 1.22 2.35 3.01(b) 2.15(b)
Provision for federal income tax ........ -- -- -- (0.36) (0.13)
------- ------- ------- ------- -------
Total from Investment Operations .............. 1.01 1.27 2.40 2.70 2.10
------- ------- ------- ------- -------
Less Distributions from:
Net investment income ................... (0.06) (0.05) (0.05) (0.05) (0.08)
Realized capital gains .................. (1.36) (1.34) (1.35) (1.28) (1.10)
------- ------- ------- ------- -------
Total Distributions ........................... (1.42) (1.39) (1.40) (1.33) (1.18)
------- ------- ------- ------- -------
Change due to rights offering (c) ............. -- -- (0.10) -- --
Impact of shares issued in dividend
reinvestment (d) ........................ -- (0.08) -- -- --
------- ------- ------- ------- -------
Total Distributions, Reinvestments
and Rights Offering ..................... (1.42) (1.47) (1.50) (1.33) (1.18)
------- ------- ------- ------- -------
Net asset value at end of year ................ $13.61 $14.02 $14.22 $13.32 $11.95
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Market price at end of year ................... $12.375 $11.063 $12.938 $13.313 $11.250
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (e)
Based on net asset value ...................... 8.8% 10.2% 19.8% 26.6% 21.7%
Based on market price ......................... 25.4% (4.4)% 9.1% 34.4% 16.2%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) .......... $1,376 $1,396 $1,351 $1,150 $988
Ratio of expenses to average net assets ....... 0.96% 0.97% 1.00% 1.01% 1.03%
Ratio of net investment income to
average net assets ......................... 0.37% 0.37% 0.39% 0.38% 0.73%
Portfolio turnover rate ....................... 83% 90% 76% 99% 70%
(a) The per share net investment income amounts do not reflect the period's
reclassification of differences between book and tax basis income
(b) Before provision for federal income tax.
(c) Effect of All-Star's rights offerings
for shares at a price below net asset value.
(d) Effect of payment of a portion of distributions in newly issued shares at
a discount from net asset value.
(e) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
See Notes to Financial Statements. ALL-STAR EQUITY FUND 31
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
--------------------------------------------------------------------------------
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 Manager is a subsidiary of Liberty Financial Companies, Inc., a
publicly traded company of which Liberty Mutual Insurance Company is the
majority shareholder.
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 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 Board of
Trustees determines 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.
32 ALL-STAR EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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. Colonial Management Associates, Inc., an
affiliate of the Manager, provides bookkeeping and pricing services for $36,000
per year plus 0.0233% of All-Star's average weekly net assets over $50 million,
0.0167% in excess of $500 million, and 0.015% in excess of $1 billion.
NOTE 3. CAPITAL TRANSACTIONS
During the years ended December 31, 2000, and December 31, 1999, distributions
in the amount of $19,294,351 and $55,329,487 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 1,535,869 and 4,579,753 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, 2000 were $1,127,955,001 and
$1,250,026,665, 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 carryovers) under
income tax regulations. These reclassifications are excluded from the per share
amounts in the Financial Highlights.
ALL-STAR EQUITY FUND 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, 2000, the results of its operations, the changes in its net assets
and the financial highlights for years ended December 31, 2000 and 1999, 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, 2000 by correspondence with the custodian
and brokers, provide a reasonable basis for our opinion. The financial
highlights of the Fund for periods prior to January 1, 1999 were audited by
other independent accountants whose report dated February 12, 1999 expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 2001
34 ALL-STAR EQUITY FUND
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 State Street Bank and
Trust Company, 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 percent 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, State Street Bank and Trust Company, c/o EquiServe,
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.
ALL-STAR EQUITY FUND 35
TAX INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
All 2000 distributions whether received in cash or shares of the Fund
consist of the following:
(1) ordinary income and
(2) long-term capital gains distributions
Below is a table that details the breakdown of each 2000 distribution for
federal income tax purposes.
TAX STATUS OF 2000 DISTRIBUTIONS
ORDINARY INCOME
--------------------
NET SHORT-TERM LONG-TERM
AMOUNT INVESTMENT CAPITAL CAPITAL
DATE PAID PER SHARE INCOME GAINS GAINS
----------------------------------------------------------------------------------------------
03/20/00 $0.33 1.78% -- 98.22%
----------------------------------------------------------------------------------------------
06/19/00 $0.36 6.20% -- 93.80%
----------------------------------------------------------------------------------------------
09/18/00 $0.37 8.09% 36.17% 55.74%
----------------------------------------------------------------------------------------------
01/02/01 $0.36 -- 39.35% 60.65%
----------------------------------------------------------------------------------------------
FOR CORPORATE SHAREHOLDERS
--------------------------------------------------------------------------------
23% of the ordinary income dividends qualify for the 70% dividend received
deduction available for corporations for the year ended December 31, 2000.
36 ALL-STAR EQUITY FUND
[LOGO]
ALL STAR
EQUITY FUND -SM-
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
617-722-6036
www.all-starfunds.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
160 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
JP Morgan Chase and Company
270 Park Avenue
New York, New York 10017-2070
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
State Street Bank and Trust Company c/o EquiServe
P.O. Box 43011, Providence, Rhode Island 02940-3011
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
TRUSTEES
Robert J. Birnbaum*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
Joseph R. Palombo
OFFICERS
Joseph R. Palombo, Chairman of the Board of Trustees
William R. Parmentier, Jr., President and Chief Executive Officer
Kevin M. Carome, Executive Vice President
Christopher S. Carabell, Vice President
Mark T. Haley, Vice President
J. Kevin Connaughton, Treasurer
William J. Ballou, Secretary
*Member of the audit committee.
[LOGO]
USA
LISTED
NYSE
[LOGO]
ALL STAR
EQUITY FUND -SM-
Liberty Asset Management Company,
Fund Manager
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
617-722-6036
www.all-starfunds.com
[LOGO] [LOGO]
USA A MEMBER OF THE
LISTED CLOSED-END
NYSE FUND
ASSOCIATION, INC.
www.closed-endfunds.com
[PICTURE OF STAR]