The U.S. equity market rewarded investors with exceptionally strong returns in 2013. The S&P 500^® Index returned 32.39 percent–its highest since 1997–as all 10 of the index’s sectors finished the year in positive territory. The widely followed Dow Jones Industrial Average (DJIA) posted 51 record highs en route to a 29.65 percent return, while the technology-focused NASDAQ Composite Index delivered the highest return of all, 40.12 percent.

Stocks were strong throughout the year, with the first and fourth quarters producing the best gains for the S&P 500–10.61 percent and 10.51 percent, respectively. In between, the S&P 500 produced a second quarter gain of 2.91 percent and a third quarter advance of 5.24 percent. Indicative of the broad-based gains for U.S. stocks, growth style investing and value style investing produced very similar returns. For the year, the Russell 1000^® Growth Index gained 33.48 percent, while the Russell 1000^® Value Index returned 32.53 percent.

Stocks surged in 2013 as the economy continued to recover at a steady, albeit moderate pace; corporate earnings continued to grow; and, perhaps most importantly, the Federal Reserve kept short-term interest rates at record low levels while continuing to inject liquidity into the financial system through its $85 billion-a-month bond buying program. Investor optimism could not be slowed by political gridlock in Washington, fears of a softer economy in China, and continuing fiscal and economic woes in the euro zone. A powerful theme running throughout the year was the industrial renaissance in the U.S., as auto, capital equipment and energy output gained strength. U.S. energy production stood out as a growth driver, as hydraulic fracturing methodologies unlocked previously inaccessible or economically impractical oil and gas deposits. While the “old economy” was strong, so was the “new economy,” as demonstrated by the market for initial public offerings (IPOs). According to The Wall Street Journal, 230 companies went public on domestic equity markets in 2013, a sharp increase over 144 in 2012.

For investors in Liberty All-Star^® Equity Fund, it was a rewarding year. The Fund returned 33.80 percent with shares valued at net asset value (NAV) with dividends reinvested and 33.52 percent with shares valued at market price with dividends reinvested. (Fund returns are net of fees.) Both returns were not only ahead of the S&P 500 and DJIA, they were also higher than the 31.38 percent return of the Lipper Large-Cap Core Mutual Fund Average. The Fund performed consistently well throughout the year, generally tracking key indices but posting its best relative performance in the third quarter. The discount at which Fund shares traded relative to their underlying NAV narrowed moderately compared with 2012, ranging from a low of 9.1 percent to a high of 12.8 percent.

Looking longer term, the Fund’s NAV and market price returns lagged the Lipper Large-Cap Core Mutual Fund Average for the trailing three-year period, but have outperformed the Lipper average over the past five years. The trailing five-year period is particularly relevant because 2013 marks five years since the steep equity sell-off of 2008 (when the S&P 500 declined 37.00 percent). In the shareholder letter for the Fund’s 2008 annual report, we noted that—even in the depths of recession and stock market retreat—it is essential for investors to keep faith in the U.S. economy and our financial markets. Indeed, investors who were able to look beyond the immediate crisis were well-rewarded. By year-end 2009, the S&P 500 gained 67.80 percent off the March 9 low and, even accounting for the steep declines in January and February, the S&P 500 gained 26.46 percent for the full year in 2009. In retrospect, the financial system did not come apart, and U.S. banks are now the most highly capitalized in the world. With regard to the Fund itself, an overweight to financial stocks hurt in 2008, but, as the Fund’s largest single sector allocation, financials made a solid contribution to return in 2013.

Fund distributions totaled $0.35 per share in 2013. As shareholders may recall, the Fund’s distribution policy has been in place since 1988 and is a major component

of the Fund’s total return. These distributions add up to $23.09 since 1987 (the Fund’s first full calendar year of operations). We would emphasize that shareholders should include these distributions when determining the return on their investment in the Fund.

One of the key principles on which the Fund was founded is multi-management, or the practice of allocating the Fund’s assets to carefully selected investment managers representing both value and growth styles of investing. Thus, we are once again offering insights into the managers’ thinking through a roundtable discussion to which all five managers have contributed. In particular, we asked the managers to comment on why participation by individual investors in the equity market has declined in recent years. We believe you will find their responses to be of interest. As we have done in recent annual reports, we once again offer a brief summary of the Fund’s attributes (on pages 4 and 5). I urge you to revisit these attributes, as they help to make the Fund a unique and attractive investment vehicle.

We are gratified that the Fund rewarded investors in 2013. Uniformly strong equity market returns set a high hurdle for an actively managed fund, like Liberty All-Star Equity^® Fund, to outperform passive benchmarks. But, the Fund was able to do that and we believe the Fund is also well positioned for the future. While we are optimistic about the prospects for 2014 and beyond, no one knows what direction equity markets will take going forward. We can, and will, however, remain diligent and disciplined and put our experience and expertise to work in service to our shareholders.

Sincerely,

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star^® Equity Fund

Investment Manager Roundtable

Timely insights for individual investors: Why the Fund’s investment managers remained focused on their disciplines in a strong market like 2013 (despite lingering worries about a reversal). And how investors–many of whom have missed the multi-year stock market rally–should be thinking about participation in the stock market.

Liberty All-Star^® Equity Fund’s five investment managers represent long experience, deep knowledge, a proven track record and, given that they represent both growth and value styles of investing, a broad point of view on the stock market and equity investing generally. Thus, once again, we are grateful to be able to call upon this resource to provide Fund shareholders with commentary and insight. The Fund’s Investment Advisor, ALPS Advisors, serves as moderator of the roundtable. Participating investment management firms, the portfolio manager for each, and their respective styles and strategies are:

CORNERSTONE CAPITAL MANAGEMENT LLC

Portfolio Manager/Thomas G. Kamp, CFA

President and Chief Investment Officer

Investment Style/Growth – Cornerstone evaluates stocks that its research identifies as offering underappreciated opportunities for growth as defined by one or more of their metrics. Stock selection is further based on the fundamentals of revenue, earnings, cash flow, and management depth and credibility.

MATRIX ASSET ADVISORS, INC.

Portfolio Manager/David A. Katz, CFA

President and Chief Executive Officer

Investment Style/Value – Matrix follows an opportunistic value-oriented investment philosophy. Matrix believes that value can be found in all sectors of the economy, and thus looks for investment opportunities beyond traditional value industries.

PZENA INVESTMENT MANAGEMENT, LLC

Portfolio Manager/Antonio DeSpirito, III

Managing Principal and Portfolio Manager

Investment Style/Value – Pzena uses fundamental research and a disciplined process to identify good companies with a sustainable business advantage that the firm believes are undervalued on the basis of current price to an estimated normal level of earnings.

SCHNEIDER CAPITAL MANAGEMENT CORPORATION

Portfolio Manager/Arnold C. Schneider, III, CFA

President and Chief Investment Officer

Investment Style/Value – The firm practices a disciplined, fundamental approach to add value over time. Research

focuses on uncovering new ideas and owning undervalued stocks before they experience a rebound in earnings and come to the attention of other investors.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Manager/Craig C. Blum, CFA

Managing Director

Investment Style/Growth – TCW invests in companies that have superior sales growth, leading and/or rising market shares, and high and/or rising profit margins. TCW’s concentrated growth equity strategy seeks companies with distinct advantages in their business model.

The year 2013 was, by just about any measure, a very good one for equity investors ... leading many prognosticators to forecast a pullback as the year progressed. Liberty All-Star^® Equity Fund investment managers, however, are more driven by bottom-up company fundamentals than top-down market conditions. When and to what extent does overall market valuation enter your decision-making? Or do you judge valuation solely on a stock-by-stock basis ... and what is your approach to valuing a security both at purchase and sale? Let’s start with the growth style managers and hear first from Tom Kamp.

Those “other opportunities” certainly include other stocks within a given sector, but they also include other opportunities within the broader equity market. Despite being equity-only investors, we are effectively rendering a judgment on the bond market as well. All of this valuation discussion must be placed within the context of the macroeconomic environment we find ourselves in. Where are interest rates now and where are they likely to head? Where are we in the economic cycle, both domestically and globally? What effects will government policy and regulatory changes have on individual industries? What about commodities? Our views on these macroeconomic variables form the framework from which we evaluate and ultimately choose one stock versus another.

We use the same valuation framework at both purchase and sale. Cornerstone will trim or completely sell a given stock under the following conditions:

Blum (TCW – Growth): We are stock pickers and judge valuation on a stock-by-stock basis. After our initial screen, we do thorough fundamental analysis on any potential new position. This includes talking to suppliers, conducting competitor analysis, sizing the end market and determining what makes the company special. We look three to five years out and look for a disconnect between the stock’s current price and our valuation. We sell a security when the valuation reflects our most optimistic outlook in order to take advantage of a superior opportunity. Of course, we can get negatively surprised and when this happens we place a stock on our review list and ask two questions: One, is the business model impaired? And, two, is the revenue opportunity impaired? If the answer to either is yes, we sell the position.

That said, we do consider the economic cycle when constructing our portfolio. We like to say that we run a balanced portfolio: Approximately two-thirds of the portfolio is in “offensive growth” stocks and one-third of the portfolio is in “defensive growth” stocks. The former are very disruptive companies with above-market volatility (betas) and may be more cyclical. Defensive growth stocks are less sensitive to GDP and are uncorrelated to the economic cycle. Besides a laser-like focus on only owning quality businesses with sustainable competitive advantages, this portfolio construction process is another way we mitigate risk in the portfolio.

Let’s get the value perspective. David Katz, what is your view?

Katz (Matrix – Value): Our primary orientation is a bottom-up process focusing on individual companies. Both at purchase and at sale, that focus is largely driven by the assessment of a company’s intrinsic value relative to its current stock price. As prospective buyers, we want the current stock price to be at a significant discount to its intrinsic value; as sellers, we would like to be selling at the company’s intrinsic value. Our intrinsic value measures are based on absolute and relative valuation models that assess earnings, dividends, return on equity, and price-to-book value and price-to-sales ratios.

While we use a bottom-up investment approach, we have found that when the market sells at extremely undervalued levels it pays to take more concentrated positions in companies, industries and sectors. Spring

2009 was such a period, for instance. Conversely, when the market approaches the higher end of its valuation range, it is prudent to increase portfolio diversification among industries and sectors.

We are currently comfortable with the market’s overall valuation, but believe that individual companies are not selling at the extremes seen four years ago. As such, our newer buys have been more diversifying and have given us added exposure to some under-represented sectors in the portfolio. We think this should lower portfolio volatility in the event of a pull-back.

DeSpirito (Pzena – Value): We adhere to a strict bottom-up investment process that compares a company’s current stock price to its long-term earnings power in making investment decisions. We construct a concentrated portfolio, generally consisting of between 30 and 40 holdings, by ranking our investment universe of the 500 largest U.S.-listed stocks from cheapest to most expensive based on this metric, and focusing our research on the least expensive 100 names to select our new investments. Opportunities are evaluated on the strength of their business franchises and the issues they need to overcome to restore profitability, with an emphasis on downside protection should our thesis not play out as planned. We sell a holding once its stock price in relation to our estimate of long-term earnings power reaches the mid-point of the investment universe.

might expect from our investments. Based on our models at the end of 2013, we would characterize the equity markets in the U.S. as being about fairly valued, with an expected return of approximately 8 percent, which is close to long-term averages, and attractive compared to fixed income alternatives. But within the broad market, there are significant valuation differences. Investors are paying premiums for dividend-paying stocks, treating them like bond substitutes, as well as for companies with stable earnings profiles, such as consumer staples. On the other hand, we are finding significant valuation discounts in a number of economically-sensitive areas, such as financials, mature technology companies and integrated energy. These sectors constitute the portfolio’s largest exposures, resulting in a portfolio valuation that continues to be attractive compared to our 18-year history.

Schneider (Schneider Capital Management – Value): Overall market valuation is not a factor in our decision-making process. Our focus is strictly on companies that, based on our fundamental research, are temporarily trading at a substantial discount to their underlying value relative to their future earnings potential. At purchase, we establish a projected price for each security, which is a function of our forecasted earnings per share as well as the projected price/earnings multiple. We also employ a proprietary ranking system that identifies which securities can add the most value to the portfolio relative to their risk weights, and we generally employ a three- to five-year investment horizon. We constantly monitor our companies for changes, both positive and negative. As a stock appreciates toward our target price, we begin to sell and redirect the proceeds to investments with greater upside potential. In the event that our research indicates that our investment thesis is no longer valid, we will sell the security.

Thank you very much. Individual investors have not shown much of an inclination to invest in stocks. A national poll conducted last April by a respected survey research firm found that only 52 percent of people said they owned shares directly or indirectly (through a mutual fund) compared with 62 percent in April 2000. Why do you believe individuals are investing at a relatively low rate? How should individual investors be thinking about participation in the stock market? Let’s hear from the value managers, starting with Arnie Schneider.

Schneider (Schneider Capital Management – Value): Investors still seem to be psychologically recovering from their equity losses in 2008 and have been keeping their fixed income investments and the related gains since then. Over time, equities have typically outperformed bonds, particularly when starting with low real fixed income yields like we have today. Investors can benefit by focusing on

Katz (Matrix – Value): We think the current disinclination toward stocks is based on recent investment experiences: poor stock market returns from 2000 to 2011, two brutal bear markets (2000 to 2002 and 2008 into the

early spring of 2009), and a feeling that the U.S. economy has lost its way. Further, many have felt that the market is stacked against the “little guy” and they have no confidence in their own navigational skills.

History has taught us that the market has been an enormous source of wealth creation for investors. Further, prolonged periods of sub-par returns–like the last decade–have generally been followed by very favorable gains.

DeSpirito (Pzena – Value): Individual investors are prone to disaster myopia. When a recent and significant negative event occurs, there is a natural human tendency to overstate the possible recurrence of that negative event until an adequate amount of time has passed to dull the memory. Two events in the last decade–the bursting of the Internet bubble and the financial crisis of 2008–still weigh heavily on investors’ minds, possibly contributing to the low rate of equity ownership. Our best suggestion about participation in the stock market is to always have a long-term perspective, and, as the old chestnut goes, “be fearful when others are greedy and greedy when others are fearful.” Sticking to an investment discipline based on valuation and long-term upside potential helps overcome the emotion that may otherwise inhibit an individual’s ability to participate in the stock market’s most attractive opportunities.

Sound thinking from experienced managers. Growth managers, let’s have your perspective, please.

Blum (TCW – Growth): Fear and greed drive markets and due to the pain of 2008 many investors are still squarely in the fear camp. Individual investors need to remember that volatility, although not easy to stomach, often provides long-term opportunities. The stock market  has  advanced  for  five

average individual investor may have been his/her own worst enemy. The evidence: 20-year annualized returns for the average investor (+2.3 percent) have not only failed to keep up with the S&P 500 Index (+8.2 percent) and bonds (+6.3 percent), they have failed to keep up with inflation (+2.5 percent).¹

Kamp (Cornerstone – Growth): We have a generation of people that has been burned by the market downturns of 2000 to 2002 and 2008 into early 2009. Many of these people have liquidated what stocks they owned to pay down credit card and home equity debt. In addition, there are many young adults who witnessed the anxiety of their parents during these downturns and, as a result, have become very risk averse. Consequently, many of these people are sitting on cash balances in their checking accounts rather than participating in the volatility of the equity market. The fact that they will certainly lose purchasing power over time carries little influence versus the pain they would feel if a stock holding went down.

Again, insightful thinking. Thank you. In the context of your previous comments, what is a long-standing holding in the portion of the Liberty All-Star^® Equity Fund that you manage that serves as a good example of your style and strategy? And, second, what is a recent addition to your portfolio that also serves as a good example of your style and strategy? Tom Kamp, share insights into two of your holdings, please.

Kamp (Cornerstone – Growth): One of our long-standing holdings that is a good example of our style and strategy is Google. This is a large-cap company that leads a very large industry, online search, that is disrupting a broader industry, advertising, growing its sales and earnings at a high-teens rate. We have actively traded around a core position in the stock since the company went public in 2004 and added value through that active trading.

In June 2013, we initiated a new position in United Rentals, Inc., the largest equipment rental company serving the construction industry. We initiated the position after the stock weakened on concerns of slowing order momentum. We believed that those concerns were misplaced since the company is consolidating a highly fragmented market and is leveraged to the non-residential construction market, which we believe is beginning to benefit from a cyclical rebound here in the U.S. As those concerns faded, the stock has rallied 40 percent from our entry point in June.

Craig Blum, what about TCW’s growth holdings?

Blum (TCW – Growth): We believe strong long-term performance may be achieved by participating in the growth and success of extraordinary businesses purchased at attractive valuations. We start by looking for companies competing in large and growing end markets, with defensible business models and wide moats (defensible positions). Often, these companies have either a product or cost advantage in an industry going through structural change. The company’s current market share may be low but its rate of share capture is quite high. Amazon, first purchased over a decade ago, is an example of a company with immense scale and a clear cost advantage. More recently, we purchased athenahealth, a cloud-based healthcare IT provider. The company’s business model is scalable, its platform is disruptive to the competition and it is rapidly gaining market share.

Value managers, what examples from your portfolios would you cite? David Katz, please start.

Katz (Matrix – Value): A long-term holding that exemplifies our investment approach is Zimmer, a company with a leading market share in orthopedic implants. Prior to our purchase in June 2009, Zimmer’s sales were down on slower procedure growth, flat pricing and market share losses. Our research indicated that the share losses were transitory, reflecting a shift to a new product cycle, and that many procedures were being deferred by patients due to the recession. At a bargain price of 11.5 times earnings, we bought a superior business with a very strong balance sheet. Subsequently, the business and stock price have had a very healthy recovery.

In mid-2013, we purchased DuPont, a company undergoing a transformation from a cyclical chemical company to a higher growth sciences company focusing on agriculture, nutrition, industrial bioscience and advanced materials. After divesting its performance coating business, DuPont acquired Danisco, a company specializing in food ingredients, enzymes and biomaterials. Today, the company has stated goals of 12 percent revenue growth, 7 percent earnings growth and continued dividend increases. We were able to buy this quality and improving franchise at a below-market multiple of 13.2 times earnings.

Arnie Schneider and Tony DeSpirito, wrap it up for us, please.

Schneider (Schneider Capital Management – Value): Weatherford International is a quintessential deep value name—it has a bloated balance sheet, was outspending cash flows, and had operational execution and tax accounting issues. Margins are still depressed but are beginning to improve, and management is in the process of selling non-core businesses and is now focused on profitability as opposed to acquisitive growth. The industry backdrop is very favorable given high oil prices, improved U.S. gas prices and expectations for 5 percent year-over-year growth in upstream capital expenditures.

A more recent addition to the portfolio is Lennar, a homebuilder with a strong balance sheet and a large land portfolio that we purchased near the bottom of the market cycle. We believe the company is well positioned to gain market share from smaller private builders. In addition, we remain optimistic on the depressed single-family housing market in general and our investment in Lennar in particular.

DeSpirito (Pzena – Value): Hewlett-Packard is a longstanding holding where investor fear over the impact of cloud computing, new technologies (e.g., tablets) and turnover in its CEO ranks has made it one of the cheapest companies in our investment universe. What emerges from our analysis, however, is that markets have overreacted. We believe HP has a solid, intact franchise serving business enterprises across a wide range of technology products and services, with a well-capitalized balanced sheet, high free cash flow and significant upside, even using conservative assumptions. TRW, a leading global auto parts manufacturer, is a recent addition to the portfolio. Cyclical weakness in the company’s European operations has given us the opportunity to buy a world-class business at an attractive valuation.

Many thanks to all for sharing excellent insights into your investment philosophy and for thoughts that may be useful to individual investors. We look forward to next year.