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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4809
---------------------------------------------
Liberty All Star Equity Fund
-------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Heidi Hoefler, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
-------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3743
----------------------------
Date of fiscal year end: December 31, 2003
--------------------------
Date of reporting period: December 31, 2003
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
Item 1. Report to Stockholders
[GRAPHIC]
[ALL STAR(R) EQUITY FUND LOGO]
ANNUAL REPORT 2003
MULTI-MANAGEMENT
[GRAPHIC]
CLOSED-END STRUCTURE
[GRAPHIC]
PROFESSIONAL MANAGEMENT
[GRAPHIC]
ACCESS TO LEADING INVESTMENT MANAGERS
[GRAPHIC]
ONGOING MONITORING AND REBALANCING
[GRAPHIC]
DISTRIBUTION POLICY
[GRAPHIC]
LIBERTY ALL - STAR EQUITY FUND
[GRAPHIC]
A SINGLE INVESTMENT...
A DIVERSIFIED CORE PORTFOLIO
Only one fund offers:
- A diversified, multi-managed portfolio of growth and value stocks
- Exposure to all of the industry sectors that make the U.S. economy the
world's most dynamic
- Access to institutional-quality investment managers
- Objective and ongoing manager evaluation
- Active portfolio rebalancing
- A quarterly fixed distribution policy
- The power of more than $1.1 billion in assets
- Listing on the New York Stock Exchange (ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
CONTENTS
1 President's Letter
4 Editorial Feature: Unique Fund Attributes
10 Consistency of Returns (Chart)
11 Investment Managers/Portfolio Characteristics
12 Manager/LAMCO Roundtable
20 Investment Growth (Chart)
21 Table of Distributions and Rights Offerings
22 Top 50 Holdings
23 Major Stock Changes in the Fourth Quarter
24 Schedule of Investments
32 Financial Statements
35 Financial Highlights
37 Notes to Financial Statements
40 Report of Independent Auditors
41 Automatic Dividend Reinvestment and Cash Purchase Plan
42 Tax Information
43 Trustees and Officers
INSIDE BACK
COVER Fund Information
[ALL STAR(R) EQUITY FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43010, Providence, Rhode Island 02940-3010
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
TRUSTEES
John A. Benning*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
Fred H. Wofford, Vice President
J. Kevin Connaughton, Treasurer
Vicki L. Benjamin, Chief Accounting Officer and Controller
David A. Rozenson, Secretary
*Member of the audit committee.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to its portfolio securities is available (1) without
charge, upon request, by calling 1-800-542-3863 or (2) on the Securities and
Exchange Commission's web site at www.sec.gov.
[USA LISTED NYSE LOGO]
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: FEBRUARY 2004
Two thousand three was a strong year for the stock market and an even stronger
year for Liberty All-Star Equity Fund shareholders. Equally gratifying, solid
performance in 2003 meant that the Fund continued to perform well versus key
benchmarks while ranking favorably relative to funds in its peer group over both
short- and long-term periods.
Certainly, the stock market's rebound from three straight negative years - a
phenomenon not seen since 1939-1941 - was universally welcomed. We will look
more closely at 2003 momentarily, but first pause to review the Fund's
performance for the fourth quarter and full year.
Looking at the table that follows, I would draw your attention to the Fund's
15.4 percent fourth quarter return based on net asset value (NAV), contributing
to the full-year 41.1 percent return based on NAV and even stronger 56.7 percent
return on a market price basis. These results considerably surpass the annual
rise of 28.7 percent and 25.6 percent, respectively, in the S&P 500 Index and
the Fund's primary benchmark, the Lipper Large-Cap Core Mutual Fund Average. As
the final line in the table shows, for the quarter and full year the Fund ranked
in the second percentile of funds in the Lipper Large-Cap Core Mutual Fund
Average, meaning that it outperformed 98 percent of the funds in that universe.
FUND STATISTICS AND SHORT-TERM PERFORMANCE
PERIODS ENDING DECEMBER 31, 2003 4TH QUARTER 2003
LIBERTY ALL-STAR EQUITY FUND
Year End Net Asset Value (NAV) $9.13
Year End Market Price $9.46
Year End Premium 3.6%
Distributions $0.22 $0.78
Market Price Trading Range $8.44 to $9.80 $6.08 to $9.80
Premium/(Discount) Range 11.7% to 2.3% 11.7% to (6.1)%
Shares Valued at NAV 15.4% 41.1%
Shares Valued at NAV with Dividends Reinvested 15.2% 40.7%
Shares Valued at Market Price with Dividends Reinvested 15.0% 56.7%
S&P 500 Index 12.2% 28.7%
Lipper Large-Cap Core Mutual Fund Average 11.1% 25.6%
Category Percentile Ranking (1=best; 100=worst) 2nd 2nd
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. Figures
shown for the unmanaged S&P 500 Index are total returns, including income. Past
performance cannot predict future results.
1
Strong performance in 2003 supports the Fund's multi-management objective: a
core equity holding offering greater consistency of returns in support of
above-average long-term performance. As the following table indicates, the Fund
is performing well when compared to its primary benchmark, as it has
outperformed it for all periods and consistently ranks in the top quartile - or
better - relative to its peer universe.
ANNUALIZED RATES OF RETURN
LONG-TERM PERFORMANCE SUMMARY ------------------------------------------------
PERIODS ENDING DECEMBER 31, 2003 3 YEARS 5 YEARS 10 YEARS 15 YEARS
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at NAV (2.8)% 1.6% 10.0% 12.0%
Shares Valued at NAV with Dividends Reinvested (2.7)% 2.0% 10.3% 12.5%
Shares Valued at Market Price with Dividends Reinvested 1.6% 4.7% 9.9% 13.8%
S&P 500 Index (4.1)% (0.6)% 11.1% 12.2%
Lipper Large-Cap Core Mutual Fund Average (6.6)% (1.8)% 8.8% 10.6%
Category Percentile Ranking (1=best; 100=worst) 10th 11th 24th 17th
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in the Fund's
rights offerings were exercised. Figures shown for the unmanaged S&P 500 Index
are total returns, including income. Past performance cannot predict future
results.
I believe that both of these tables - highlighting short- and long-term
performance - demonstrate the Fund's underlying strengths. Its structure as a
closed-end, multi-managed fund provides shareholders with access to
institutional quality investment managers and exposure to the two primary equity
investment styles, growth and value. Management and ongoing monitoring by the
Fund manager, Liberty Asset Management Company (LAMCO), ensure alignment with
shareholder interests and that the investment managers are performing up to
expectations. A fuller description of the Fund's unique attributes may be found
in this Annual Report's feature section, which immediately follows this letter.
I encourage you to review it.
Turning to 2003, most investors feel that the market's recovery actually
began with the lows reached on October 9, 2002. You may recall that the S&P 500
Index gained 8.4 percent in the final quarter of 2002 and then declined 3.2
percent in the first quarter of 2003, with investors moving to the sidelines as
war with Iraq moved ever closer. Once hostilities actually broke out and the
uncertainty was removed, investors gained confidence and returned to the stock
market, leading the S&P 500 to a 15.4 percent second quarter gain. Of course,
monetary and fiscal policy helped greatly. The Federal Reserve lowered the Fed
funds rate to 1.0 percent - a level not seen since the Eisenhower administration
- and President Bush shepherded his $350 billion economic package - including a
lower tax on dividends - to Congressional passage in May. In addition, inflation
remained quiescent, corporate profits were strong (one of the best trough to
peak earnings recoveries in the postwar era) and GDP gained momentum, leading up
to an annualized 8-plus percent surge in the third quarter.
2
[PHOTO OF MARK T. HALEY, WILLIAM R. PARMENTIER, JR. AND FRED H. WOFFORD]
OFFICERS OF LIBERTY ALL-STAR EQUITY FUND, FROM LEFT: MARK T. HALEY, CFA, VICE
PRESIDENT - INVESTMENTS; WILLIAM R. PARMENTIER, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER; AND FRED H. WOFFORD, VICE PRESIDENT - OPERATIONS.
For further analysis of 2003 and a look ahead, I would recommend to you our
annual Manager Roundtable, which begins on page 12. This year's Roundtable is
especially insightful, as the managers summarize their varying styles and
strategies, allowing shareholders to see and compare the differences (a source
of the diversification that is among the Fund's primary attributes). In
addition, in a departure from past Roundtables, we at LAMCO offer our own
comments at the end of each discussion point, allowing shareholders to gain
better insights into the perspective we bring to Fund management.
In summary, we are very pleased with the Fund's performance in 2003 as well
as with its long-term results. We are optimistic over prospects for 2004, but
realistically believe that it will be extremely difficult to top 2003. That may
be for the better. A sound if unspectacular year may be in investors' best
long-term interests.
Be assured that as we move forward your team here at LAMCO remains dedicated
to the Fund's founding principles, to integrity in all that we do, and to
managing with our shareholders' best interests first and foremost. We thank you
for your ongoing support of the Fund.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
3
UNIQUE FUND ATTRIBUTES
MULTI-MANAGEMENT
[GRAPHIC]
Multi-management is the process of allocating Fund assets among several
carefully selected investment managers with complementary investment styles.
That is an important factor distinguishing Liberty All-Star Equity Fund from
other funds. The Fund doesn't have one investment manager, but five. Why?
Multi-management is intended to diversify the Fund and lower risk. Three of the
Fund's managers have a value style of investing and two are growth style
managers. This mix of styles recognizes that any single style rotates in and out
of favor as investor sentiment shifts. Individually, the five managers may
experience volatility as a result of the ever-changing forces that shape the
market. At the portfolio level, however, the blending of differing styles and
strategies can dampen volatility and produce more consistent long-term returns.
Multi-management is widely practiced by large institutional investors, such as
endowments, foundations and pension plans. It is found far less frequently in
funds in which individuals can invest. Liberty Asset Management Company (LAMCO),
the Fund manager, was among the first investment firms to bring multi-management
to individual investors when Liberty All-Star Equity Fund was founded in 1986.
AS ADVISOR TO THE ALL-STAR EQUITY FUND, LIBERTY ASSET MANAGEMENT
4
CLOSED-END STRUCTURE
[GRAPHIC]
Liberty All-Star Equity Fund is a closed-end fund, a characteristic that
distinguishes it from most investment funds, which are open-end mutual funds. An
open-end mutual fund creates or redeems shares continuously as money flows into
or out of the fund. Closed-end funds, by contrast, have a fixed number of shares
that are traded between investors on a stock exchange (the Fund is listed on the
New York Stock Exchange but trades on other exchanges, as well). Why does
closed-end versus open-end matter to investors? An exchange-traded, closed-end
fund is bought and sold just like the shares of other publicly traded
securities. Pricing is intra-day - not just end-of-day, as is the case with
open-end mutual funds. A transaction price is continuously available and there
are no annual sales fees. From the perspective of the five investment managers,
the Fund's closed-end structure gives them the confidence of knowing that they
will not experience sharp inflows or outflows of assets. Thus, they are able to
focus on stock selection and investing for the long term instead of being
influenced by cash flows that can occur at inappropriate times. Finally,
closed-end funds do not have minimum transaction or balance requirements and do
not incur ongoing costs associated with distributing their shares, often
resulting in lower expense ratios.
COMPANY (LAMCO) ADDS VALUE FOR INVESTORS BY PRACTICING A WELL-
5
PROFESSIONAL MANAGEMENT
[GRAPHIC]
Investors in Liberty All-Star Equity Fund benefit from having multiple levels of
investment professionals acting on their behalf. At the first level, the
professionals at LAMCO research and evaluate a broad universe of investment
management firms, selecting those few that meet a rigorous set of criteria. Once
chosen, the investment managers are closely monitored by LAMCO, which considers
a range of factors, including their investment performance. The investment
managers themselves represent the second level. The investment managers chosen
for Liberty All-Star Equity Fund are institutional-quality managers -
"all-stars" in their field - and operate independently of LAMCO. That means
there are no affiliations or alliances with the investment managers, and that
they have just one mandate: consistent implementation of their style and
strategy in pursuit of good performance. At the third level is the Fund's
independent Board of Trustees. This Board, elected by the shareholders, has
oversight responsibility for Fund operations to ensure that decisions reflect
the shareholders' best interests.
DEFINED AND DISCIPLINED INVESTMENT MANAGEMENT PROCESS.
6
ACCESS TO LEADING INVESTMENT MANAGERS
[GRAPHIC]
Manager selection is perhaps the critical decision for any investor. There are
thousands of investment management firms from which to choose, and their
long-term investment performance varies widely. Many of the most sought-after
investment managers are closed to new investors and many of the best performing
managers invest only for institutions, not individuals. LAMCO provides Fund
shareholders with access to these leading investment managers. In the search for
managers, LAMCO calls on the expertise of its professional staff,
state-of-the-art analytical tools and years of experience in the investment
industry. In selecting investment managers for the Fund, LAMCO conducts in-depth
research and rigorous due diligence, focusing on the "four Ps" ... that is, each
manager's philosophy, process, people and performance. We seek investment
management firms that have demonstrated a consistent application of their style
(instead of abandoning their style when it is temporarily out of favor) and a
clearly articulated, disciplined investment process. We also want to see a
well-managed organization and continuity among a firm's investment
professionals.
LAMCO BRINGS OBJECTIVITY, EXPERIENCE AND EXPERTISE TO
7
ONGOING MONITORING AND REBALANCING
[GRAPHIC]
It's not enough to simply select all-star investment managers. Constant
vigilance is required to ensure that each is performing up to expectations and
contributing to Fund performance. Like all businesses, investment management
firms can change over time. Ownership and key personnel can change. Market
pressures may lead a firm to deviate from its investment style and strategy.
Individual investors often have difficulty knowing that the fund in which they
originally invested has changed. LAMCO's active monitoring guards against that.
We analyze the Fund's investment managers' trading activity and the
characteristics of their holdings to confirm that they are adhering to their
style and performing well relative to their peers. We also evaluate changes in
key decision makers, should they occur. When warranted, LAMCO replaces managers.
This has happened 12 times during the Fund's 17-year history. LAMCO also
proactively rebalances the Fund when necessary. Portfolio rebalancing maintains
the Fund's structural integrity and is a well-recognized risk management tool.
Disciplined, periodic rebalancing keeps the Fund's assets equally divided among
its five investment managers. Owing to shifting market sentiment and their
differing styles and strategies, the investment managers will perform
differently over time. This can unbalance the portfolio. When this happens,
LAMCO "locks in" profits by taking assets from the managers whose style and
strategy have been in favor and giving them to those whose style and strategy
have been out of favor. While this seems counterintuitive, it is really a case
of taking money from today's winners and redeploying it among tomorrow's.
CONSTRUCTING AND MONITORING A MULTI-MANAGED PORTFOLIO, AND
8
DISTRIBUTION POLICY
[GRAPHIC]
Since 1988, the Fund has followed a policy of paying annual distributions on its
shares at a rate of 10 percent of net asset value (paid quarterly at 2.5 percent
per quarter), providing a systematic mechanism for distributing funds to
shareholders. Because a portion of the portfolio is turned over when an
investment manager is replaced (often generating realized capital gains), the
Fund's multi-management investment approach and the payout policy complement one
another. Recognizing the diverse needs of the Fund's shareholders, LAMCO also
offers an Automatic Dividend Reinvestment and Cash Purchase Plan. Some investors
prefer their dividends in the form of cash. Others reinvest their dividends in
additional Fund shares, thus letting their dividends compound over time. The
Cash Purchase feature allows shareholders to make additional investments in the
Fund on a monthly basis. LAMCO rounds out its services for shareholders by
providing a range of tools, such as a Web site at www.all-starfunds.com;
communications, such as monthly updates and quarterly reports; and shareholder
assistance via toll-free telephone at 1-800-LIB-FUND.
IS DEDICATED TO THE LONG-TERM SUCCESS OF FUND SHAREHOLDERS.
9
MULTI-MANAGEMENT HAS PRODUCED MORE CONSISTENT RETURNS
The narrative on the preceding six pages is intended to focus on the unique
attributes of the Fund. This chart demonstrates the long-term outcome of these
attributes, particularly the Fund's multi-management structure. Most mutual
funds are run by a single portfolio manager or an internal team of managers
pursuing a particular investment style, whether it's growth or value. But styles
go in and out of favor. A style that outperforms on a relative basis one year
may disappoint the next, leading to higher volatility. As discussed in our Fund
Attributes feature, LAMCO utilizes multi-management, that is, combining managers
who practice different investment styles to reduce volatility while producing
competitive returns.
All-Star's long-term track record provides clear testimony to the value of
the multi-management strategy. The chart below demonstrates that since
All-Star's first full calendar year of operation 17 years ago, the Fund has
achieved better-than-average returns and better-than-average consistency
compared with peer funds in the Lipper Large-Cap Core universe.
[CHART]
Each dot represents the 17-year return and consistency record ending December
31, 2003, of each fund in the universe of 56 open-end Large-Cap Core equity
mutual funds (as classified by Lipper, Inc.) that has a 17-year history.
Consistency is measured by the volatility of "non-market" monthly returns,
calculated by subtracting the return of the S&P 500 Index from each mutual
fund's return. The lower the volatility, the higher the consistency of results
compared with the stock market.
10
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S ASSETS ARE APPROXIMATELY EQUALLY DISTRIBUTED AMONG THREE VALUE
MANAGERS AND TWO GROWTH MANAGERS:
[CHART]
SCHNEIDER CAPITAL MANAGEMENT
VALUE/Companies that are overlooked and undervalued where the firm expects a
rebound in earnings.
PZENA INVESTMENT MANAGEMENT, LLC
VALUE/Companies with low price-to-normalized earnings ratios that have the
ability to generate earnings recovery.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
VALUE/Companies with low price-to-earnings and price-to-book ratios where a
catalyst for positive change has been identified.
MASTRAPASQUA ASSET MANAGEMENT, INC.
GROWTH/Companies whose valuations do not reflect the potential for accelerated
earnings and cash flow growth.
TCW INVESTMENT MANAGEMENT COMPANY
GROWTH/Companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN PORTFOLIO
CHARACTERISTICS:
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of a
multi-managed portfolio. The characteristics are different for each of the
Fund's five investment managers. These differences are a reflection of the fact
that each pursues a different investment style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Index.
INVESTMENT STYLE SPECTRUM
VALUE GROWTH
PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 2003
(UNAUDITED)
BOSTON MASTRA- TOTAL S&P
SCHNEIDER PZENA PARTNERS PASQUA TCW FUND 500 INDEX
Number of Holdings 49 37 36 37 28 169* 500
Percent of Holdings in Top 10 45% 40% 45% 38% 55% 17% 23%
Weighted Average Market
Capitalization (billions) $ 12 $ 31 $ 49 $ 39 $ 59 $ 38 $ 90
Average Five-Year
Earnings Per Share Growth (1)% 10% 13% 4% 13% 8% 9%
Dividend Yield 1.0% 2.0% 1.4% 0.3% 0.3% 1.0% 1.6%
Price/Earnings Ratio 26x 14x 15x 28x 34x 21x 21x
Price/Book Value Ratio 2.6x 2.7x 3.0x 4.7x 6.1x 3.5x 4.2x
*Certain holdings are held by more than one manager.
11
MANAGER/LAMCO ROUNDTABLE
THEIR GROWTH OR VALUE STRATEGY LEADS THE MANAGERS TO INVEST DIFFERENTLY, BUT
THEY ARE ALIKE IN ADHERING TO A DISCIPLINED PROCESS
FUND STRUCTURE - IN PARTICULAR, MULTIPLE GROWTH AND VALUE INVESTMENT MANAGERS -
PROVED REWARDING FOR SHAREHOLDERS IN 2003. IN THIS ROUNDTABLE, THE MANAGERS
REFLECT ON THEIR INDIVIDUAL STYLE AND STRATEGY AS THEY DISCUSS THEIR APPROACHES
AND TAKE ON ISSUES RANGING FROM GLOBALIZATION TO PROSPECTS FOR THE STOCK MARKET.
Continuing a tradition, the Fund's manager, Liberty Asset Management Company
(LAMCO), recently had the opportunity to moderate another annual roundtable with
the Fund's five investment managers. In a departure from past practice, in this
roundtable LAMCO offers its perspective - as a further insight for investors -
at the conclusion of the discussion on each point.
The managers' comments clearly reflect their investment orientation - growth
or value. However, in reading this roundtable, Fund shareholders should note how
all the managers have a clearly defined philosophy and adhere rigorously to
their investment process. Diversification of styles and strategies is a Fund
strength, while quality is the common characteristic shared by the managers. The
participating investment managers and their styles are:
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGERS' VIEWS AND LAMCO'S
PERSPECTIVE AT THE TIME OF THE DISCUSSION (JANUARY 2004) AND ARE SUBJECT TO
CHANGE.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
PORTFOLIO MANAGER/Mark E. Donovan, CFA,
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 ASSET MANAGEMENT, INC.
PORTFOLIO MANAGER/Frank Mastrapasqua, Ph.D.,
Chairman and Chief Executive Officer
INVESTMENT STYLE/Growth - Mastrapasqua uses proprietary screens, in-house
research and direct contact with managements to select growth companies with
compelling valuations. Mastrapasqua focuses on companies with proven competitive
advantage and profitability records. A proprietary risk-adjusted
price-to-earnings ratio is computed and compared to an independently derived
long-term earnings growth rate. Companies selected for investment have projected
growth rates that exceed the risk-adjusted price-to-earnings ratio.
PZENA INVESTMENT MANAGEMENT, LLC
PORTFOLIO MANAGER/Richard S. Pzena,
Managing Principal and Chief Executive Officer
INVESTMENT STYLE/Value - Pzena uses fundamental research and a disciplined
process to identify good companies that the firm believes are undervalued on the
basis of current price to an estimated normal level of earnings. Companies in
the portfolio have a sustainable business advantage and a sound business plan to
restore earnings to normal.
SCHNEIDER CAPITAL MANAGEMENT
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 in the belief
that the broader market is slow to react to change, particularly where
out-of-favor stocks are concerned. Owning these stocks before they experience a
rebound in earnings and come to the attention of other investors creates the
opportunity for price appreciation before fundamentals warrant the stock be
sold.
[SIDENOTE]
"WE'RE TRYING TO FIND GOOD COMPANIES WHEN THEIR SHARE PRICES GET VERY DEPRESSED
RELATIVE TO THE ABILITY OF THE UNDERLYING BUSINESS TO GENERATE EARNINGS AND CASH
FLOW OVER THE LONG TERM."
RICH PZENA,
PZENA INVESTMENT MANAGEMENT
(VALUE)
12
TCW INVESTMENT MANAGEMENT COMPANY
PORTFOLIO MANAGER/Glen E. Bickerstaff, Vice Chairman
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.
LAMCO: Having all the investment managers participate in a Roundtable is an
excellent opportunity for Fund shareholders to compare the varying investment
approaches that are combined to form the Liberty All-Star Equity Fund. Thus,
we'd like to open by asking you to briefly summarize your investment philosophy
and approach. Rich Pzena, you're the newest investment manager for the Fund, so
we'll give you the honor of starting off.
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): We are old-fashioned value
investors. Some people would use the term "deep value." We think of it in a
fairly straightforward way: We're trying to find good companies when their share
prices get very depressed relative to the ability of the underlying business to
generate earnings and cash flow over the long term. We approach these businesses
with a fairly healthy dose of realism; that is, you don't get to buy the best
businesses with the fastest growth rates and the wonderful management teams and
all of the characteristics that everybody wants for the simple reason that they
don't sell for a low price. Many times, however, there are good businesses that
do get marked down, generally because something has gone wrong. Our whole
philosophy is to try and identify those companies and then make the judgment as
to which ones are really good businesses where the problems are only temporary.
LAMCO: Mark Donovan, summarize Boston Partners' approach, please.
DONOVAN (BOSTON PARTNERS - VALUE): Our investment philosophy is based on three
key principles: a value discipline, focused internal research and risk aversion.
This philosophy is executed through a bottom-up strategy in which we work to
identify undervalued companies with strong business fundamentals and a positive
business outlook. While each of these individual elements is an important
component in the investment process, companies demonstrating all three
characteristics generally provide superior performance over a long-term
investment horizon.
LAMCO: Let's hear from the third value manager, Arnie Schneider.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): We believe that disciplined
value investing, built on a research-driven foundation, can deliver investment
success over time. Promising opportunities can be found among securities that
are most deeply undervalued relative to their future earnings potential. Our
research process is geared toward identifying securities with low investor
expectations that are temporarily trading at a substantial discount to their
underlying business value.
LAMCO: Let's turn to the two growth managers and ask Glen Bickerstaff and Frank
Mastrapasqua to summarize their respective approaches.
BICKERSTAFF (TCW - GROWTH): We believe superior returns can be achieved by
maintaining a long-term perspective and emphasizing the highest quality
companies that have open-ended growth opportunities. We construct concentrated,
conviction-weighted portfolios of companies that possess sustainable competitive
advantages, allowing them to capitalize on long-term growth opportunities.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Our investment philosophy
is to build client wealth through disciplined portfolio management. We are a
sector focused, large-to-mid capitalization growth manager. We analyze
investments using our proprietary screens, in-house research and direct contact
with companies, striving to grow investment principal without excess exposure to
risk. Independent
[SIDENOTE]
"OUR INVESTMENT PHILOSOPHY IS BASED ON THREE KEY PRINCIPLES: A VALUE DISCIPLINE,
FOCUSED INTERNAL RESEARCH AND RISK AVERSION."
MARK DONOVAN,
BOSTON PARTNERS (VALUE)
13
research gives us a competitive advantage. Our analysts evaluate company growth
potential, which includes market share prospects, financial condition, key
components of earnings and cash flow growth, execution of management's vision,
and competitive advantage. We utilize a proprietary valuation process called the
GRAD Point methodology (Growth to Risk-Adjusted Differential), which
risk-adjusts the price-to-earnings ratio and compares it to the 3- to 5-year
earnings per share projected growth rate.
LAMCO PERSPECTIVE: THE INVESTMENT MANAGERS' RESPONSES CLEARLY HIGHLIGHT THE
DIVERSIFICATION THAT THE FUND OFFERS TO SHAREHOLDERS. THE MANAGERS NOT ONLY
PURSUE DIFFERENT INVESTMENT STYLES - GROWTH AND VALUE - BUT DIFFERENT SUBSTYLES,
PHILOSOPHIES AND INVESTMENT PROCESSES. THE COMMON CHARACTERISTIC THAT ALL FIVE
MANAGERS SHARE IS QUALITY. WE AT LAMCO LOOK FOR THE SAME QUALITY ATTRIBUTES IN
THE INVESTMENT MANAGERS THAT THE INVESTMENT MANAGERS LOOK FOR IN PORTFOLIO
COMPANIES: A CLEAR VISION AND WELL-ARTICULATED STRATEGY; PROPRIETARY ADVANTAGE,
SUCH AS RESEARCH; SMART, SEASONED MANAGEMENT; CONTINUITY AMONG KEY PERSONNEL;
AND A SOLID RECORD OF PERFORMANCE COMPARED TO THEIR PEERS.
LAMCO: In a vein similar to our first discussion point, this roundtable also
gives us an opportunity to compare top-down and bottom-up investment approaches.
To what extent are you more a bottom-up manager or a top-down manager? Or do you
factor both perspectives into your thinking? Let's take responses in reverse
order this time, leading with you, Frank Mastrapasqua.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): We combine both the
top-down and bottom-up approach. Over the years, our above-average investment
performance is primarily derived from both our sector and individual company
selections.
BICKERSTAFF (TCW - GROWTH): We do some of both but we are not market timers. We
do not think we have any advantage over other investors in guessing what will
become fashionable in the stock market. Moreover, we do not place a lot of faith
in the accuracy of economists' forecasts. We are primarily bottom-up investors.
We spend most of our time evaluating companies, their addressable markets and
the competitive environment in which they operate. Additionally, however, we do
try to identify long-term secular trends that create open-ended growth
opportunities for leading companies.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): We employ more of a bottom-up
approach that focuses on analysis of the financial and investment potential of
individual companies. Our investment decisions are not based on predicting, for
example, the pace of global economic growth, the direction of interest rates or
major demographic trends.
DONOVAN (BOSTON PARTNERS - VALUE): Although we pay attention to the macro events
unfolding around the globe, Boston Partners is first and foremost a bottom-up,
research-driven manager. Our bottom-up approach to investing combines
quantitative screening (10 percent of the process) with comprehensive
fundamental analysis (90 percent of the process) and is applied across all
equity investments.
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): We focus on opportunities as they
present themselves from the bottom-up, using a disciplined investment process to
implement our intensive proprietary research. Our investment process involves
several steps. First, we rank the 500 largest U.S.-listed companies from
cheapest to most expensive on the basis of price-to-normalized earnings. Next,
we focus our research efforts on companies in the most undervalued 20 percent of
the universe. Third, we perform rigorous, in-depth analysis typically
culminating in discussions with senior company management. Fourth, we refine our
earnings model and make a final investment decision. Then, we continually
monitor and evaluate each position, including follow-up visits to or discussions
with senior management.
LAMCO PERSPECTIVE: THE INVESTMENT MANAGERS WE SELECTED
[SIDENOTE]
"WE ANALYZE INVESTMENTS USING OUR PROPRIETARY SCREENS, IN-HOUSE RESEARCH AND
DIRECT CONTACT WITH COMPANIES, STRIVING TO GROW INVESTMENT PRINCIPAL WITHOUT
EXCESS EXPOSURE TO RISK."
FRANK MASTRAPASQUA,
MASTRAPASQUA ASSET MANAGEMENT
(GROWTH)
14
PLACE THEIR EMPHASIS ON BEING GOOD STOCK PICKERS. THEY DON'T IGNORE THE MACRO
ENVIRONMENT, BUT THEIR FOCUS IS ON FINDING SOLID COMPANIES WITH EXCELLENT
PROSPECTS.
LAMCO: There's a collective sigh of relief now that 2003 has gone down in the
history books as a positive year for equity investors. Looking back from the
perspective of your investment style (either value or growth), how would you
summarize the stock market during 2003? Why don't we ask the growth style
managers to lead off, starting with Glen Bickerstaff.
BICKERSTAFF (TCW - GROWTH): Two thousand three appears to have been a fairly
normal recovery from a bear market bottom, which was reached in October of 2002.
Since that time, the economy has improved, sentiment is a bit better, valuations
are a little higher and interest rates are a bit lower. Those
economically-sensitive stocks whose fortunes are most keenly impacted by the
economic cycle were generally the best performers.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): The fundamental revenue
and earnings recovery began for most companies in 2002 while the stock market
continued falling into the fall months of 2002, reflecting concerns over
corporate malfeasance and Afghanistan/Iraq. The 2003 market recovery largely
gets us back to the early 2002 levels, but does not yet fully reflect continuing
earnings gains that are consistently being reported above consensus estimates.
Accelerating economic growth in 2003 fostered the earnings rebound.
LAMCO: How do the value managers view 2003? Let's ask Mark Donovan to start.
DONOVAN (BOSTON PARTNERS - VALUE): Two thousand three was an exciting year for
investors, yet a puzzling year for professional money managers. Fundamentals and
valuations were ignored for a majority of the year and the top performing stocks
were the smaller cap companies with a share price less than $5 and that, for the
most part, were losing money. The good news for those managers that did not
focus on this universe exclusively is that virtually every style and asset class
posted positive performance. What we tend to forget is that investing is a
long-term process, and regardless of the volatility experienced over the last
four years, the long-term track record of the equity markets is close to its
historical norm.
LAMCO: Let's hear from Arnie Schneider and Rich Pzena.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Strong growth in global
economies and U.S. corporate profits, combined with persistently low interest
rates, contributed to the healthy advance in equity prices. However, we believe
that a dramatic improvement in investor sentiment and confidence played an
equally important role in the rise in equity prices. Investors finally curbed
their excessive worry and hand-wringing in the face of mounting evidence of a
self-sustaining, synchronized and global economic expansion.
The market recovery was a relief to investors, but it is worth noting that
the Russell 3000 Index, which represents the broad U.S. equity market, ended the
year 25 percent below the all-time high reached in March 2000. The strong
advance also brought the index only to the level it had first crossed back in
December 1998.
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): Two thousand three was an
outstanding year for equities, as economically-sensitive stocks drove returns.
Growth and value performed about equally, but small cap stocks outperformed
large caps. Our portfolio benefited from
[SIDENOTE]
"OUR RESEARCH PROCESS IS GEARED TOWARD IDENTIFYING SECURITIES WITH LOW INVESTOR
EXPECTATIONS THAT ARE TEMPORARILY TRADING AT A SUBSTANTIAL DISCOUNT TO THEIR
UNDERLYING BUSINESS VALUE."
ARNIE SCHNEIDER,
SCHNEIDER CAPITAL MANAGEMENT
(VALUE)
"WE CONSTRUCT CONCENTRATED, CONVICTION-WEIGHTED PORTFOLIOS OF COMPANIES THAT
POSSESS SUSTAINABLE COMPETITIVE ADVANTAGES, ALLOWING THEM TO CAPITALIZE ON
LONG-TERM GROWTH OPPORTUNITIES."
GLEN BICKERSTAFF,
TCW (GROWTH)
15
overweight positions in deeply undervalued companies sensitive to the economic
cycle that were revalued based on the accelerating economic recovery.
LAMCO PERSPECTIVE: THE MANAGERS WERE WELL POSITIONED TO PARTICIPATE IN A
RECOVERING ECONOMY AND A REBOUNDING STOCK MARKET, AS EVIDENCED BY THE FUND'S 41
PERCENT-PLUS RETURN BASED ON NET ASSET VALUE IN 2003. PERHAPS EVEN MORE
GRATIFYING, THE FUND RANKED IN THE SECOND PERCENTILE AMONG ITS PEER FUNDS IN THE
LIPPER LARGE-CAP CORE MUTUAL FUND AVERAGE, I.E., IT OUTPERFORMED 98 PERCENT OF
THE FUNDS IN ITS PEER GROUP. LONGER-TERM FUND PERFORMANCE IS ALSO WELL AHEAD OF
MOST PEER FUNDS, AS THE FUND RANKS IN THE TENTH PERCENTILE FOR THE PAST THREE
YEARS AND IN THE ELEVENTH PERCENTILE FOR THE PAST FIVE YEARS.
LAMCO: Liberty All-Star Equity Fund may be a domestic equity fund - but it (like
any other domestic fund) is surely subject to perhaps the most pervasive force
of our era: globalization. The pluses and minuses of globalization are
frequently debated - sometimes heatedly. As an investor, how do you seek to
benefit from the upside of globalization, and how do you seek to protect
yourself from its downside? Let's hear from the value managers first - Arnie
Schneider, Rich Pzena and Mark Donovan.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): The emergence of countries
such as China and India on the global economic scene will present both
opportunities and challenges to investors in U.S. stocks. As a result, it is
important to understand the competitive advantages and disadvantages that these
countries possess when assessing the merits of a particular investment. For
example, China's lack of several key natural resources presents an opportunity
for countries and companies that own or transport them. China will need to
import massive amounts of industrial commodities such as alumina, copper and
iron ore to support their manufacturing sector, as well as large public
investments in the country's infrastructure. On the other hand, China and India
possess a huge competitive advantage in providing many products and services
that have a large labor component. Their low-cost labor pools will become
increasingly productive and better-educated over time, and will continue to
exert pressure on global prices for many products and selected services.
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): Given our bottom-up orientation, we
feel the answers to the dilemma are often business-specific. As investors, we
focus on companies that have taken advantage of lower cost locations and moved
facilities to remain competitive. One good example that we own in the All-Star
portfolio is Whirlpool, a company that is actively developing its global
manufacturing footprint, which will enhance its ability to supply low cost
manufacturing solutions to all the major markets it serves worldwide. To protect
on the downside, we analyze a company's cost position vis-a-vis its global
competitors to get comfortable that it is not structurally disadvantaged from a
manufacturing cost perspective.
DONOVAN (BOSTON PARTNERS - VALUE): Globalization is positive for all investors
as it results in the survival of the fittest. This is consistent with the
long-term nature of investing. As an investment manager, we attempt to benefit
from this process by investing in "best of class" companies or companies with a
distinct competitive advantage versus their peers. Maintaining a competitive
advantage will help sustain growth in market share and increase profitability. A
disciplined process - one that can identify trends - is one way in which an
investor can change course before an investment becomes the bottom of the food
chain.
[SIDENOTE]
"IMPROVING ECONOMIC CONDITIONS ABROAD - PARTICULARLY IN JAPAN AND EUROPE - AND
CONTINUED HIGH GROWTH IN CHINA PLACE MULTINATIONALS IN A UNIQUE POSITION TO
EXPERIENCE UPSIDE EARNINGS LEVERAGE."
FRANK MASTRAPASQUA,
MASTRAPASQUA ASSET MANAGEMENT
(GROWTH)
"GLOBALIZATION IS POSITIVE FOR ALL INVESTORS AS IT RESULTS IN THE SURVIVAL OF
THE FITTEST. THIS IS CONSISTENT WITH THE LONG-TERM NATURE OF INVESTING. AS AN
INVESTMENT MANAGER, WE ATTEMPT TO BENEFIT FROM THIS PROCESS BY INVESTING IN
'BEST OF CLASS' COMPANIES..."
MARK DONOVAN,
BOSTON PARTNERS (VALUE)
16
LAMCO: Glen Bickerstaff, how does a growth manager look at globalization?
BICKERSTAFF (TCW - GROWTH): Globalization, to us, is the widening of the playing
field and the upping of the ante for all players. Customers, worldwide, now have
unprecedented access to the best products at the most advantageous prices and
terms. This means great companies have a much larger opportunity and weak
companies become that much more vulnerable.
LAMCO: Frank Mastrapasqua, what's your perspective on globalization?
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Improving economic
conditions abroad - particularly in Japan and Europe - and continued high growth
in China place multinationals in a unique position to experience upside earnings
leverage. The expansion of corporate markets and the enhanced ability of
corporations to lower costs are the earnings drivers. All companies in the
portfolio benefit directly or indirectly from these two very positive trends.
The often-stated negatives to globalization are the loss of manufacturing jobs
and the loss of industries that could be critical to national defense. Our
portfolio companies have essentially no exposure to these potential downsides of
globalization.
LAMCO PERSPECTIVE: THE MANAGERS' CONSENSUS IS THAT THE FUND IS POSITIONED TO
BENEFIT MORE FROM GLOBALIZATION THAN IT IS TO BE HARMED BY IT. WE WOULD AGREE.
IN SOME CASES, IT'S A MATTER OF TAKING ADVANTAGE OF A LARGER OPPORTUNITY SET, IN
OTHERS IT'S STEPPING UP TO MEET THE RIGORS OF COMPETING WITH WORLD-CLASS
COMPANIES. GLOBALIZATION IS NOT WITHOUT CHALLENGES, BUT STRONG COMPANIES
OPERATING IN A MARKET-BASED ECONOMY LIKE OURS TYPICALLY ADAPT AND ADJUST TO STAY
ON THE LEADING EDGE.
LAMCO: What issue or potential problem most concerns you going forward? And the
reverse: what are you most sanguine about? Let's ask the growth managers to take
this one first, starting with Frank Mastrapasqua.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): The risk of terrorist
activities remains an ever-present concern. In addition, in spite of powerful
productivity and low utilization constraints on inflation, the continuation of a
weak dollar could potentially introduce rising inflation expectations. However,
our competitive position in world markets improves and near term profits are
enhanced by the dollar's decline. The tax cut and monetary stimulus are driving
above-average growth rates that should be sustainable through at least 2004 and
form the backdrop for further upside earnings surprises. Furthermore, a
suppressed capital spending environment over the last three years is being
replaced by a "need" to modernize.
BICKERSTAFF (TCW - GROWTH): We are sanguine about the profit power of leading
companies and the sustainability of the global synchronized economic recovery.
We have a powerful backdrop for strong cash flow growth. Alternatively, we are
concerned that we may see interest rate increases in 2004 that could lead to a
contraction in price/earnings multiples. With the economic expansion underway,
the Fed has an opportunity to build rates back up, without derailing the
recovery. It is the Fed's job to pre-empt inflation and cool an overheated
economy. The current discount rate is well below where it could even begin to
have any effect. In order for the Fed to put itself in a position where rate
increases could have an effect it may need to establish a threshold that is
meaningfully above where we are today. It is hard to say when the Fed makes its
move, how far it goes and over what time period, but, all things being equal,
higher rates will mean lower P/Es.
LAMCO: How about the value managers' thoughts? What do you feel good about and
what worries you, Rich Pzena?
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): Our greatest concerns involve
potential shocks or disruptions to the economy. A sharp spike in interest rates
could put company growth rates and profits at risk due to the high level of
household debt. Given the recent
[SIDENOTE]
"WE ARE SANGUINE ABOUT THE PROFIT POWER OF LEADING COMPANIES AND THE
SUSTAINABILITY OF THE GLOBAL SYNCHRONIZED ECONOMIC RECOVERY. WE HAVE A POWERFUL
BACKDROP FOR STRONG CASH FLOW GROWTH."
GLEN BICKERSTAFF,
TCW (GROWTH)
17
market run, we worry that current expectations might be met with disappointment.
On the other side of the coin, we feel that the current market environment
favors money managers with a disciplined, research-oriented approach to
investing, such as ours, as the macro opportunities created by market
distortions during the bubble-and-bust period have been virtually eliminated.
We've always believed it takes two things to win in investing over the long term
- intensive research coupled with a disciplined investment process.
LAMCO: Share your views, please, Mark Donovan and Arnie Schneider.
DONOVAN (BOSTON PARTNERS - VALUE): Despite our bottom-up approach, one issue
that gives us concern is the current weakness in the U.S. dollar. Continued
weakness will most likely add to the upward pressure on interest rates, which
may have a direct effect on the stock market. We are most sanguine on the
current trend in corporate profitability. We believe that earnings trends are
sustainable given corporate America's success at de-levering its balance sheet
and increasing productivity.
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): A concern is the fate of the
dollar, as it adds an uncertain element to the outlook. The dollar's decline in
2003 was, in our judgment, both orderly and justified, but a full-blown dollar
crisis would be very disruptive. On a trade-weighted basis, its value still
stands about 7 percent above the 1990s average and 17 percent above the low it
reached in 1995. In the short term, the decline may boost sales and employment
in many industries, as well as increase the dollar value of profits earned
abroad by U.S. multinationals. Although the risk is fairly low, a large, abrupt
decline could upset the financial markets and spill over into the real economy.
Now that we are a "debtor" nation that runs up chronically large deficits in our
accounts with non-U.S. economies, our long-term financial health is increasingly
dependent on the willingness of foreigners to purchase and hold larger and
larger amounts of our stocks, bonds and money market instruments. It is
difficult to predict the circumstances that might disrupt the status quo, but
the effects would be unfriendly and unwelcome to U.S. investors.
On the positive side, the U.S. and China played a large part in jump-starting
the global economic recovery. However, we think investors may have
underestimated the ability of other emerging markets, such as India and Brazil,
to contribute to the next leg of the global expansion. Most emerging markets
countries have been experiencing positive economic growth and can be expected to
grow at twice the rate of developed economies. Their historical dependence on
exports to developed markets is decreasing, as the larger emerging markets are
establishing more trade within their regional economies. In addition, the
mounting prosperity of the local populations has increased domestic demand and
consumption. Finally, emerging markets' overall balance of payments and foreign
reserves picture has improved.
LAMCO PERSPECTIVE: PERSISTENT WEAKNESS IN THE DOLLAR IS A PRIMARY CONCERN TO TWO
MANAGERS, AND TWO MANAGERS ARE ESPECIALLY SANGUINE ABOUT IMPROVED CORPORATE
PROFITABILITY. THERE IS NO OVERRIDING CONSENSUS, HOWEVER - AND THAT IS A
POSITIVE, AS THE INVESTMENT MANAGERS ARE ADDRESSING A BROAD RANGE OF POTENTIAL
PROBLEMS AND OPPORTUNITIES. OVERALL, WE BELIEVE SHAREHOLDERS SHOULD NOTE THE
THOUGHTFULNESS OF THE RESPONSES AS A CLEAR INDICATION THAT THE INVESTMENT
MANAGERS ARE SENSITIVE TO RISK SCENARIOS, YET RECEPTIVE TO OPPORTUNITIES.
COLLECTIVELY, THEIR VIEWS COULD BE SUMMARIZED AS "THE GLASS IS HALF FULL."
LAMCO: This has been a great discussion. Now, we'd like to see how the managers'
varying investment approaches and thoughts on the current environment are
playing out in terms of stock picks. We'd like to ask each of you to name one
stock that you've added to the portion of the Liberty All-Star Equity Fund that
you manage. Let's see what a value manager and what a growth manager have added.
Arnie Schneider, we'll stay with you on the value side and ask Frank
Mastrapasqua to give us the growth pick.
[SIDENOTE]
"... THE CURRENT MARKET ENVIRONMENT FAVORS MONEY MANAGERS WITH A DISCIPLINED,
RESEARCH-ORIENTED APPROACH TO INVESTING, SUCH AS OURS ... AS MARKET DISTORTIONS
DURING THE BUBBLE-AND-BUST PERIOD HAVE BEEN VIRTUALLY ELIMINATED."
RICH PZENA,
PZENA INVESTMENT MANAGEMENT
(VALUE)
18
SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Boeing is a significant
holding in the portion of the Fund that we manage. The company will benefit from
the eventual gradual recovery of the global airline and air travel industries,
as 2003/2004 will mark the trough of new aircraft deliveries. Although the
industry is suffering through the worst downturn in the history of commercial
aviation, Boeing's commercial aircraft division has remained profitable due to
aggressive cost cutting and an acute focus on return on capital. Additionally,
nearly 50 percent of the company's $50 billion in revenue is derived from its
leading-edge military business, which has industry-leading returns. The stock
became very cheap last spring and summer relative to our estimates of the firm's
earnings potential.
MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): We like Alcon, Inc., a
company with a broad product portfolio in ophthalmology. The company recently
launched the next generation intraocular lens, the first lens to protect from
ultraviolet light. The company is in phase III clinical trials for Retaane for
treating age-related macular degeneration (AMD), currently an untreatable
disease affecting 5 million individuals in the U.S. alone. The company is also
on track for a launch of the INFINITI, a next generation laser system for
cataract surgery.
LAMCO: Two interesting picks. Let's compare stocks that our other two value
managers like. Rich Pzena and Mark Donovan, what do you like and why?
PZENA (PZENA INVESTMENT MANAGEMENT - VALUE): We recently added Sara Lee to the
portfolio. Sara Lee is a consumer products company that competes in five
segments: meats, bakery, beverage, household products and underwear. Despite
having brands with leading positions - e.g., Hanes, Jimmy Dean and Hills
Brothers - and strong cash flow, Sara Lee has struggled in recent years due to
poor acquisitions and marketing strategies, and the stock is priced as if these
problems are likely to recur in the future. In contrast, we see a stable set of
businesses where management is focused on improving key brands and deploying
cash effectively - in other words, no large acquisitions. At around $21 a share,
Sara Lee represents significant value just above eight times our normal earnings
estimate of $2.50.
DONOVAN (BOSTON PARTNERS - VALUE): A recent addition to the portfolio was Xerox.
We believe that Xerox is clearly on the path to recovery after several years of
exceedingly weak results. Xerox is experiencing strong sales growth trends for
its digital and color imaging products, which are gaining share in the
enterprise market. This growth is being masked by the ongoing run-off of Xerox's
older, analog products. As we approach the time when analog sales virtually
disappear, we believe investors will better appreciate the success Xerox is
having with its newer products. Xerox continues to make significant strides in
improving its balance sheet, as management is committed to attaining an
investment-grade credit rating.
LAMCO: Likewise, very interesting. Glen Bickerstaff, let's return to the growth
side and ask you to wrap things up with your pick.
BICKERSTAFF (TCW - GROWTH): Our newest purchase is Starbucks. The company enjoys
true product advantage, as it is able to charge premium prices for coffee
drinks, whole bean coffee, ice cream and coffee accessories. The company is debt
free, is highly profitable and has an enormous growth opportunity from here.
LAMCO PERSPECTIVE: THE MANAGERS' RECENT PURCHASES CLEARLY REFLECT THEIR
PARTICULAR STYLE AND STRATEGY. LAMCO MONITORS THE MANAGERS' TRADING OVER TIME TO
ENSURE THAT THIS ACTIVITY REFLECTS THEIR PROFESSED STYLE AND THAT THE MANAGERS
COMPLEMENT ONE ANOTHER WITHIN THE TOTAL ALL-STAR EQUITY FUND PORTFOLIO. ALL FIVE
INVESTMENT MANAGERS ARE CONSISTENTLY PRACTICING THEIR RESPECTIVE STYLE AND
STRATEGY, AS LAMCO INTENDED.
[SIDENOTE]
"STRONG GROWTH IN GLOBAL ECONOMIES AND U.S. CORPORATE PROFITS, COMBINED WITH
PERSISTENTLY LOW INTEREST RATES, CONTRIBUTED TO THE HEALTHY ADVANCE IN EQUITY
PRICES [IN 2003]
....A DRAMATIC IMPROVEMENT IN INVESTOR SENTIMENT AND CONFIDENCE PLAYED AN EQUALLY
IMPORTANT ROLE..."
ARNIE SCHNEIDER,
SCHNEIDER CAPITAL MANAGEMENT
(VALUE)
19
INVESTMENT GROWTH AS OF DECEMBER 31, 2003
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the growth of a $10,000 investment assuming purchase
of common shares at the closing market price (NYSE: USA) of $6.00 on December
31, 1987, and tracking its progress through December 31, 2003. This 16-year
period covers the calendar years since the Fund commenced its 10 percent
distribution policy in 1988.
[CHART]
The dark blue region of the graph above reflects the growth of the investment
assuming all distributions were received in cash and not reinvested back in the
Fund. The value of the investment under this scenario grew to $45,667 (this
value includes distributions per share totaling $17.94 during the period,
including tax credits of $0.67 per share on retained capital gains).
The light blue region of the graph depicts additional value realized through
reinvestment of all distributions and participation in all the rights offerings
under the terms of each offering. On five occasions, the Fund has conducted
rights offerings that allow shareholders to purchase additional shares at a
discount. The value of the investment under this scenario grew to $91,340.
20
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS
RIGHTS OFFERINGS
-----------------------------------------------
PER SHARE SHARES NEEDED TO PURCHASE SUBSCRIPTION
YEAR DISTRIBUTIONS ONE ADDITIONAL SHARE PRICE TAX CREDITS*
1988 $ 0.64
1989 0.95
1990 0.90
1991 1.02
1992 1.07 10 $ 10.05
1993 1.07 15 10.41 $ 0.18
1994 1.00 15 9.14
1995 1.04
1996 1.18 0.13
1997 1.33 0.36
1998 1.40 20 12.83
1999 1.39
2000 1.42
2001 1.20
2002 0.88 10 8.99
2003 0.78
*The Fund's net investment income and net realized capital gains exceeded the
amount to be distributed under the Fund's 10 percent distribution policy. In
each case, the Fund elected to pay taxes on the undistributed income and
passed through a proportionate tax credit to shareholders.
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its shares totaling approximately 10 percent of its net asset
value per year, payable in four quarterly installments of 2.5 percent of the
Fund's net asset value at the close of the New York Stock Exchange on the Friday
prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES AND MAY BE TAXED AS ORDINARY INCOME UP TO THE AMOUNT OF
THE FUND'S CURRENT AND ACCUMULATED EARNINGS AND PROFITS. If, for any calendar
year, the total distributions made under the 10 percent pay-out policy exceed
the Fund's net investment income and net realized capital gains, the excess will
generally be treated as a 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 amount distributed under the 10
percent pay-out policy, the Fund may, in its discretion, retain and not
distribute net realized capital gains and pay income tax thereon to the extent
of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.
21
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 12/31/03 OF 9/30/03 SECURITY NAME VALUE ($000) NET ASSETS
1 8 The Boeing Co. $ 25,426 2.2%
2 1 Freddie Mac 22,637 2.0
3 2 Genentech, Inc. 22,382 1.9
4 3 The Progressive Corp. 20,179 1.8
5 29 CIT Group, Inc. 18,938 1.6
6 7 Tyco International Ltd. 18,765 1.6
7 5 Amgen, Inc. 17,477 1.5
8 6 Amazon.com, Inc. 17,234 1.5
9 12 Intel Corp. 16,573 1.4
10 16 Applied Materials, Inc. 15,520 1.3
11 11 Cisco Systems, Inc. 14,732 1.3
12 76 Aetna, Inc. 14,351 1.2
13 31 Liberty Media Corp., Class A 13,894 1.2
14 114 CIGNA Corp. 12,670 1.1
15 18 Agilent Technologies, Inc. 12,646 1.1
16 36 Kerr-McGee Corp. 11,757 1.0
17 26 Yahoo!, Inc. 11,627 1.0
18 37 Xerox Corp. 11,527 1.0
19 57 Sanmina-SCI Corp. 11,349 1.0
20 145 Loews Corp. 11,064 1.0
21 10 Microsoft Corp. 10,985 1.0
22 38 AT&T Wireless Services, Inc. 10,717 0.9
23 14 Network Appliance, Inc. 10,698 0.9
24 25 eBay, Inc. 10,580 0.9
25 21 Pfizer, Inc. 10,497 0.9
26 23 Maxim Integrated Products, Inc. 10,373 0.9
27 39 J.C. Penney Co., Inc. 10,278 0.9
28 30 PG&E Corp. 10,178 0.9
29 52 Hewlett-Packard Co. 9,822 0.9
30 40 VERITAS Software Corp. 9,810 0.9
31 New Computer Associates International, Inc. 9,724 0.8
32 43 ACE Ltd. 9,713 0.8
33 51 Transocean, Inc. 9,297 0.8
34 19 Procter & Gamble Co. 9,189 0.8
35 42 Invitrogen Corp. 9,100 0.8
36 New Aon Corp. 9,027 0.8
37 20 MedImmune, Inc. 8,915 0.8
38 53 Xilinx, Inc. 8,879 0.8
39 New RadioShack Corp. 8,818 0.8
40 60 FleetBoston Financial Corp. 8,730 0.8
41 New BellSouth Corp. 8,680 0.8
42 New Sara Lee Corp. 8,680 0.8
43 49 Starwood Hotels & Resorts Worldwide, Inc. 8,591 0.7
44 56 Avnet, Inc. 8,182 0.7
45 35 The Charles Schwab Corp. 8,094 0.7
46 15 Dell, Inc. 7,902 0.7
47 New ConocoPhillips 7,890 0.7
48 74 Berkshire Hathaway, Inc., Class B 7,502 0.7
49 New Whirlpool Corp. 7,416 0.6
50 46 Eli Lilly and Co. 7,371 0.6
22
MAJOR STOCK CHANGES IN THE FOURTH QUARTER
The following are the major ($4.0 million or more) stock changes - both
purchases and sales - that were made in the Fund's portfolio during the fourth
quarter of 2003, not including changes resulting from the manager replacement of
Oppenheimer Capital with Pzena Investment Management, LLC effective October 15,
2003.
SECURITY NAME PURCHASES (SALES) SHARES AS OF 12/31/03
PURCHASES
Aetna, Inc. 65,775 212,350
ConocoPhillips 84,675 120,325
RadioShack Corp. 151,200 287,425
SALES
Countrywide Financial Corp. (48,070) 81,097*
Hewlett-Packard Co. (254,075) 427,600
Micron Technology, Inc. (385,000) 375,000
The Progressive Corp. (57,600) 241,405
Teradyne, Inc. (456,800) 254,000
Wyeth (96,500) 0
* Adjusted for stock split
23
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2003
COMMON STOCKS (97.3%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (14.3%)
AUTO COMPONENTS (0.8%)
Johnson Controls, Inc. 48,650 $ 5,649,238
Visteon Corp. 349,300 3,636,213
---------------
9,285,451
---------------
AUTOMOBILES (0.4%)
Harley-Davidson, Inc. 96,100 4,567,633
---------------
HOTELS, RESTAURANTS & LEISURE (2.1%)
Carnival Corp. 139,000 5,522,470
Harrah's Entertainment, Inc. 95,900 4,772,943
Starbucks Corp. (a) 164,360 5,433,742
Starwood Hotels & Resorts Worldwide, Inc. 238,825 8,590,535
---------------
24,319,690
---------------
HOUSEHOLD DURABLES (0.8%)
Newell Rubbermaid, Inc. 84,650 1,927,481
Whirlpool Corp. 102,075 7,415,749
---------------
9,343,230
---------------
INTERNET & CATALOG RETAIL (2.4%)
Amazon.com, Inc. (a) 327,400 17,234,336
eBay, Inc. (a) 163,800 10,579,842
---------------
27,814,178
---------------
LEISURE EQUIPMENT & PRODUCTS (0.4%)
Brunswick Corp. 76,850 2,446,136
Mattel, Inc. 99,400 1,915,438
---------------
4,361,574
---------------
MEDIA (3.1%)
Comcast Corp., Class A (a) 125,000 3,910,000
Fox Entertainment Group, Inc., Class A (a) 150,000 4,372,500
Liberty Media Corp., Class A (a) 1,168,532 13,893,845
Pixar, Inc. (a) 98,000 6,790,420
Viacom, Inc., Class B 89,700 3,980,886
The Walt Disney Co. 141,000 3,289,530
---------------
36,237,181
---------------
MULTI-LINE RETAIL (1.9%)
J.C. Penney Co., Inc. 391,100 10,278,108
Target Corp. 165,000 6,336,000
Wal-Mart Stores, Inc. 90,500 4,801,025
---------------
21,415,133
---------------
SPECIALTY RETAIL (2.0%)
The Gap, Inc. 258,000 5,988,180
The Home Depot, Inc. 143,000 5,075,070
RadioShack Corp. 287,425 8,818,199
TJX Companies, Inc. 130,000 2,866,500
See Notes to Schedule of Investments.
24
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
SPECIALTY RETAIL (CONTINUED)
Toys "R" Us, Inc. (a) 40,300 $ 509,392
---------------
23,257,341
---------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Liz Claiborne, Inc. 142,300 5,045,958
---------------
CONSUMER STAPLES (4.9%)
BEVERAGES (0.4%)
PepsiCo, Inc. 106,600 4,969,692
---------------
FOOD & STAPLES RETAILING (0.8%)
CVS Corp. 142,400 5,143,488
Walgreen Co. 123,200 4,482,016
---------------
9,625,504
---------------
FOOD PRODUCTS (2.3%)
Archer-Daniels-Midland Co. 199,850 3,041,717
H. J. Heinz Co. 83,000 3,023,690
Sara Lee Corp. 399,800 8,679,658
Smithfield Foods, Inc. (a) 143,400 2,968,380
Tate & Lyle PLC (b) 313,750 6,998,319
Tyson Foods, Inc., Class A 90,500 1,198,220
---------------
25,909,984
---------------
HOUSEHOLD PRODUCTS (0.8%)
Procter & Gamble Co. 92,000 9,188,960
---------------
TOBACCO (0.6%)
Altria Group, Inc. 68,950 3,752,259
UST, Inc. 84,800 3,026,512
---------------
6,778,771
---------------
ENERGY (4.5%)
ENERGY EQUIPMENT & SERVICES (1.1%)
Schlumberger Ltd. 60,000 3,283,200
Transocean, Inc. (a) 387,200 9,296,672
---------------
12,579,872
---------------
OIL & GAS (3.4%)
Canadian Natural Resources Ltd. 96,200 4,852,328
ChevronTexaco Corp. 77,200 6,669,308
ConocoPhillips 120,325 7,889,710
Kerr-McGee Corp. 252,900 11,757,321
Premcor, Inc. (a) 174,150 4,527,900
Shell Transport & Trading Co. (b) 74,100 3,336,723
Valero Energy Corp. 12,300 569,982
---------------
39,603,272
---------------
See Notes to Schedule of Investments.
25
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
FINANCIALS (18.7%)
CAPITAL MARKETS (1.9%)
The Charles Schwab Corp. 683,620 $ 8,094,061
Goldman Sachs Group, Inc. 45,000 4,442,850
Merrill Lynch & Co., Inc. 90,000 5,278,500
Morgan Stanley 80,150 4,638,281
---------------
22,453,692
---------------
COMMERCIAL BANKS (1.4%)
Comerica, Inc. 86,750 4,863,205
FleetBoston Financial Corp. (c) 200,000 8,730,000
National City Corp. 89,700 3,044,418
---------------
16,637,623
---------------
DIVERSIFIED FINANCIAL SERVICES (2.1%)
CIT Group, Inc. 526,775 18,937,561
Citigroup, Inc. 98,175 4,765,414
---------------
23,702,975
---------------
INSURANCE (9.0%)
ACE Ltd. 234,500 9,712,990
AFLAC, Inc. 173,700 6,284,466
Allstate Corp. 141,525 6,088,406
American International Group, Inc. 72,050 4,775,474
Aon Corp. 377,075 9,027,176
Berkshire Hathaway, Inc., Class B (a) 2,665 7,501,975
Loews Corp. 223,750 11,064,438
MBIA, Inc. 79,650 4,717,670
MetLife, Inc. 152,000 5,117,840
Nationwide Financial Services, Class A 10,005 330,765
The Progressive Corp. 241,405 20,179,044
Torchmark Corp. 130,475 5,941,831
Travelers Property Casualty Corp., Class A 333,000 5,587,740
XL Capital Ltd., Class A 90,325 7,004,704
---------------
103,334,519
---------------
REAL ESTATE (0.4%)
The St. Joe Co. 108,425 4,043,168
---------------
THRIFTS & MORTGAGE FINANCE (3.9%)
Countrywide Financial Corp. 81,097 6,151,182
Fannie Mae 82,700 6,207,462
Freddie Mac 388,150 22,636,908
Radian Group, Inc. 81,575 3,976,781
Washington Mutual, Inc. 157,500 6,318,900
---------------
45,291,233
---------------
See Notes to Schedule of Investments.
26
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
HEALTH CARE (13.5%)
BIOTECHNOLOGY (6.5%)
Amgen, Inc. (a) 282,800 $ 17,477,040
Biogen Idec, Inc. (a) 146,000 5,369,880
Cephalon, Inc. (a) 100,000 4,841,000
Genentech, Inc. (a) 239,200 22,381,944
Genzyme Corp. (a) 138,000 6,808,920
Invitrogen Corp. (a) 130,000 9,100,000
MedImmune, Inc. (a) 351,000 8,915,400
---------------
74,894,184
---------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.9%)
Alcon, Inc. 74,000 4,479,960
Baxter International, Inc. 28,650 874,398
Fisher Scientific International, Inc. (a) 120,000 4,964,400
---------------
10,318,758
---------------
HEALTH CARE PROVIDERS & SERVICES (3.4%)
Aetna, Inc. 212,350 14,350,613
AmerisourceBergen Corp. 93,200 5,233,180
CIGNA Corp. 220,350 12,670,125
Tenet Healthcare Corp. (a) 453,825 7,283,891
---------------
39,537,809
---------------
PHARMACEUTICALS (2.7%)
Bristol-Myers Squibb Co. 178,125 5,094,375
Eli Lilly and Co. 104,800 7,370,584
Pfizer, Inc. 297,100 10,496,543
Schering Plough Corp. 290,825 5,057,447
Shire Pharmaceuticals Group PLC (a)(b) 123,400 3,584,770
---------------
31,603,719
---------------
INDUSTRIALS (9.2%)
AEROSPACE & DEFENSE (2.7%)
The Boeing Co. 603,375 25,426,222
Lockheed Martin Corp. 116,100 5,967,540
---------------
31,393,762
---------------
AIR FREIGHT & LOGISTICS (1.2%)
Expeditors International of Washington, Inc. 116,000 4,368,560
FedEx Corp. 71,000 4,792,500
Ryder System, Inc. 136,000 4,644,400
---------------
13,805,460
---------------
AIRLINES (0.5%)
Delta Air Lines, Inc. 67,950 802,490
Southwest Airlines Co. 311,100 5,021,154
---------------
5,823,644
---------------
See Notes to Schedule of Investments.
27
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
COMMERCIAL SERVICES & SUPPLIES (0.4%)
Cendant Corp. (a) 210,700 $ 4,692,289
---------------
INDUSTRIAL CONGLOMERATES (2.0%)
General Electric Co. 125,700 3,894,186
Tyco International Ltd. 708,100 18,764,650
---------------
22,658,836
---------------
MACHINERY (0.7%)
Navistar International Corp. (a) 132,800 6,359,792
PACCAR, Inc. 16,725 1,423,632
---------------
7,783,424
---------------
ROAD & RAIL (1.7%)
CSX Corp. 179,750 6,460,215
Swift Transportation Co., Inc. (a) 172,075 3,617,017
Union Pacific Corp. 88,950 6,180,246
Werner Enterprises, Inc. 183,125 3,569,106
---------------
19,826,584
---------------
INFORMATION TECHNOLOGY (23.5%)
COMMUNICATIONS EQUIPMENT (1.6%)
Cisco Systems, Inc. (a) 606,500 14,731,885
QUALCOMM, Inc. 69,300 3,737,349
---------------
18,469,234
---------------
COMPUTERS & PERIPHERALS (3.8%)
Dell, Inc. (a) 232,700 7,902,492
EMC Corp. (a) 547,500 7,073,700
Hewlett-Packard Co. 427,600 9,821,972
Network Appliance, Inc. (a) 521,100 10,698,183
Seagate Technology (a) 200,000 3,780,000
Sun Microsystems, Inc. (a) 931,200 4,181,088
---------------
43,457,435
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.8%)
Agilent Technologies, Inc. (a) 432,475 12,645,569
Arrow Electronics, Inc. (a) 28,900 668,746
Avnet, Inc. (a) 377,750 8,182,065
Jabil Circuit, Inc. (a) 206,000 5,829,800
Sanmina-SCI Corp. (a) 900,000 11,349,000
Waters Corp. (a) 167,000 5,537,720
---------------
44,212,900
---------------
INTERNET SOFTWARE & SERVICES (1.0%)
Yahoo! Inc. (a) 257,400 11,626,758
---------------
IT SERVICES (0.8%)
Accenture Ltd., Class A (a) 139,100 3,661,112
Electronic Data Systems Corp. 236,625 5,806,777
---------------
9,467,889
---------------
See Notes to Schedule of Investments.
28
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
OFFICE ELECTRONICS (1.0%)
Xerox Corp. (a) 835,300 $ 11,527,140
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.3%)
Analog Devices, Inc. 155,000 7,075,750
Applied Materials, Inc. (a) 691,320 15,520,134
Intel Corp. 514,700 16,573,340
Maxim Integrated Products, Inc. 208,300 10,373,340
Micron Technology, Inc. (a) 375,000 5,051,250
Novellus Systems, Inc. (a) 160,000 6,728,000
Teradyne, Inc. (a) 254,000 6,464,300
Texas Instruments, Inc. 240,000 7,051,200
Xilinx, Inc. (a) 229,200 8,879,208
---------------
83,716,522
---------------
SOFTWARE (4.2%)
BMC Software, Inc. (a) 226,600 4,226,090
Computer Associates International, Inc. 355,675 9,724,154
Microsoft Corp. 398,865 10,984,742
Oracle Corp. (a) 550,000 7,260,000
Symantec Corp. (a) 200,000 6,930,000
VERITAS Software Corp. (a) 264,000 9,810,240
---------------
48,935,226
---------------
MATERIALS (4.0%)
CHEMICALS (1.5%)
Ashland, Inc. 55,510 2,445,771
The Dow Chemical Co. 100,850 4,192,334
IMC Global, Inc. 619,200 6,148,656
Monsanto Co. 160,525 4,619,909
---------------
17,406,670
---------------
CONTAINERS & PACKAGING (0.5%)
Smurfit-Stone Container Corp. (a) 280,600 5,210,742
---------------
METALS & MINING (1.5%)
Alcan, Inc. 131,500 6,173,925
CONSOL Energy, Inc. 179,700 4,654,230
Freeport-McMoRan Copper & Gold, Inc., Class A 10,050 423,407
Nucor Corp. 12,300 688,800
United States Steel Corp. 154,650 5,415,843
---------------
17,356,205
---------------
PAPER & FOREST PRODUCTS (0.5%)
Abitibi Consolidated, Inc. 501,900 4,070,409
International Paper Co. 25,050 1,079,905
Weyerhaeuser Co. 2,050 131,200
---------------
5,281,514
---------------
See Notes to Schedule of Investments.
29
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
TELECOMMUNICATION SERVICES (2.7%)
DIVERSIFIED TELECOMMUNICATION SERVICES (1.8%)
BellSouth Corp. 306,725 $ 8,680,318
CenturyTel, Inc. 137,000 4,468,940
SBC Communications, Inc. 269,000 7,012,830
---------------
20,162,088
---------------
WIRELESS TELECOMMUNICATION SERVICES (0.9%)
AT&T Wireless Services, Inc. (a) 1,341,300 10,716,987
---------------
UTILITIES (2.0%)
ELECTRIC UTILITIES (1.3%)
PG&E Corp. (a) 366,500 10,177,705
Wisconsin Energy Corp. 142,950 4,781,678
---------------
14,959,383
---------------
MULTI-UTILITIES & UNREGULATED POWER (0.7%)
Reliant Resources, Inc. (a) 841,500 6,193,440
Scana Corp. 67,725 2,319,581
---------------
8,513,021
---------------
TOTAL COMMON STOCKS (COST OF $1,004,269,694) 1,123,124,817
---------------
See Notes to Schedule of Investments.
30
INTEREST MATURITY PAR
CONVERTIBLE BONDS (0.6%) RATE DATE VALUE MARKET VALUE
INFORMATION TECHNOLOGY (0.1%)
COMMUNICATIONS EQUIPMENT (0.1%)
Corning, Inc. 3.50% 11/01/08 $ 743,000 $ 920,391
---------------
MATERIALS (0.5%)
METALS & MINING (0.5%)
Freeport-McMoRan Copper & Gold, Inc. 8.25% 01/31/06 1,837,000 5,458,186
---------------
TOTAL CONVERTIBLE BONDS (COST OF $3,696,346) 6,378,577
---------------
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
Repurchase agreement with State Street Bank & Trust Co., dated 12/31/03, due
01/02/04 at 0.78%, collateralized by U.S. Treasury Bonds with various
maturities to 11/15/27, market value $29,196,757 (Repurchase proceeds
$28,603,239) (Cost of $28,602,000) 28,602,000 28,602,000
---------------
TOTAL INVESTMENTS (100.4%) (COST OF $1,036,568,040) (d) 1,158,105,394
OTHER ASSETS AND LIABILITIES, NET (-0.4%) (5,185,495)
---------------
NET ASSETS (100.0%) $ 1,152,919,899
===============
NET ASSET VALUE PER SHARE (126,212,465 SHARES OUTSTANDING) $ 9.13
===============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing.
(b) Represents an American Depositary Receipt.
(c) Investments in Affiliates as of December 31, 2003:
Security Name: FleetBoston Financial Corp. ("FBFC"). LAMCO is a wholly
owned indirect subsidiary of FBFC.
Shares as of 12/31/02: 200,000
Shares as of 12/31/03: 200,000
Dividend income earned: $280,000
Value at end of period: $8,730,000
(d) Cost for federal income tax purposes is $1,050,430,321.
Gross unrealized appreciation and depreciation of investments at
December 31, 2003 is as follows:
Gross unrealized appreciation $ 194,560,006
Gross unrealized depreciation (86,884,933)
--------------
Net unrealized appreciation $ 107,675,073
==============
See Notes to Financial Statements.
31
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003
ASSETS:
Investments at market value (identified cost $1,036,568,040) $ 1,158,105,394
Cash 2,185
Receivable for investments sold 12,418,811
Dividends and interest receivable 1,305,342
---------------
TOTAL ASSETS 1,171,831,732
---------------
LIABILITIES:
Payable for investments purchased 4,659,784
Distributions payable to shareholders 13,189,588
Investment advisory, administrative and bookkeeping/pricing fees payable 842,550
Accrued expenses 219,911
---------------
TOTAL LIABILITIES 18,911,833
---------------
NET ASSETS $ 1,152,919,899
===============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized; 126,212,465 shares outstanding) $ 1,045,244,518
Accumulated net realized loss on investments less distributions (13,862,281)
Net unrealized appreciation on investments and foreign currency translations 121,537,662
---------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($9.13 PER SHARE) $ 1,152,919,899
===============
See Notes to Financial Statements.
32
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003
INVESTMENT INCOME:
Dividends $ 10,585,601
Interest 542,901
---------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $87,220) 11,128,502
EXPENSES:
Investment advisory fee $ 7,141,241
Administrative fee 1,790,269
Bookkeeping and pricing fees 220,437
Custodian fee 60,265
Transfer agent fees 171,064
Shareholder communication expenses 330,851
Trustees' fees and expense 96,003
NYSE fee 124,760
Miscellaneous expenses 174,351
---------------
TOTAL EXPENSES 10,109,241
---------------
CUSTODY EARNINGS CREDIT (674)
---------------
NET EXPENSES 10,108,567
---------------
NET INVESTMENT INCOME 1,019,935
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 660,193,599
Cost of investments sold 599,058,691
---------------
Net realized gain on investment transactions 61,134,908
Net unrealized appreciation (depreciation) on investments and
foreign currency:
Beginning of year (157,619,740)
End of year 121,537,662
---------------
Change in unrealized depreciation-net 279,157,402
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 341,312,245
===============
See Notes to Financial Statements.
33
YEAR ENDED DECEMBER 31,
------------------------------------
STATEMENT OF CHANGES IN NET ASSETS 2003 2002
OPERATIONS:
Net investment income $ 1,019,935 $ 1,038,036
Net realized gain (loss) on investment transactions 61,134,908 (40,350,769)
Change in unrealized appreciation (depreciation)
on investments and foreign currency-net 279,157,402 (256,081,922)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 341,312,245 (295,394,655)
--------------- ---------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (1,019,983) (1,038,036)
Net realized gain on investments (37,070,493) (2,485,163)
Paid-in capital (57,734,539) (97,967,285)
--------------- ---------------
Total distributions (95,825,015) (101,490,484)
--------------- ---------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering -- 95,753,976
Dividend reinvestments 38,881,100 36,519,053
--------------- ---------------
Increase in net assets from capital share transactions 38,881,100 132,273,029
--------------- ---------------
Total increase (decrease) in net assets 284,368,330 (264,612,110)
NET ASSETS:
Beginning of year 868,551,569 1,133,163,679
--------------- ---------------
End of year $ 1,152,919,899 $ 868,551,569
=============== ===============
See Notes to Financial Statements.
34
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 7.14 $ 10.65 $ 13.61 $ 14.02 $ 14.22
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.01 0.01 0.03 0.05 0.05
Net realized and unrealized gain (loss)
on investments and foreign currency 2.76 (2.56) (1.79) 0.96 1.22
-------- -------- -------- -------- --------
Total from Investment Operations 2.77 (2.55) (1.76) 1.01 1.27
-------- -------- -------- -------- --------
Less Distributions from:
Net investment income (0.01) (0.01) (0.03) (0.06) (0.05)
Realized capital gain (0.30) (0.02) (1.17) (1.36) (1.34)
Paid-in capital (0.47) (0.85) -- -- --
-------- -------- -------- -------- --------
Total Distributions (0.78) (0.88) (1.20) (1.42) (1.39)
-------- -------- -------- -------- --------
Change due to rights offering (a) -- (0.08) -- -- --
Impact of shares issued in dividend
reinvestment (b) -- -- -- -- (0.08)
-------- -------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (0.78) (0.96) (1.20) (1.42) (1.47)
-------- -------- -------- -------- --------
Net asset value at end of year $ 9.13 $ 7.14 $ 10.65 $ 13.61 $ 14.02
======== ======== ======== ======== ========
Market price at end of year $ 9.46 $ 6.64 $ 11.09 $ 12.375 $ 11.063
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 40.7% (25.0)% (12.7)% 8.8% 10.2%
Based on market price 56.7% (33.0)% 0.0% 25.4% (4.4)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 1,153 $ 869 $ 1,133 $ 1,376 $ 1,396
Ratio of expenses to average net assets (d) 1.04% 1.05% 1.03% 0.96% 0.97%
Ratio of net investment income to
average net assets (d) 0.11% 0.11% 0.27% 0.37% 0.37%
Portfolio turnover rate 64% 83% 64% 83% 90%
(a) Effect of All-Star's rights offerings for shares at a price below net asset
value.
(b) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
(c) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(d) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
See Notes to Financial Statements.
35
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.05 0.05 0.08 0.10 0.11
Net realized and unrealized gain (loss)
on investments and foreign currency 2.35 3.01(a) 2.15(a) 2.71 (0.20)
Provision for federal income tax -- (0.36) (0.13) -- --
-------- -------- -------- -------- --------
Total from Investment Operations 2.40 2.70 2.10 2.81 (0.09)
-------- -------- -------- -------- --------
Less Distributions from:
Net investment income (0.05) (0.05) (0.08) (0.10) (0.12)
Realized capital gain (1.35) (1.28) (1.10) (0.94) (0.52)
Paid-in capital -- -- -- -- (0.36)
-------- -------- -------- -------- --------
Total Distributions (1.40) (1.33) (1.18) (1.04) (1.00)
-------- -------- -------- -------- --------
Change due to rights offering (b) (0.10) -- -- -- (0.05)
-------- -------- -------- -------- --------
Total Distributions and Rights Offering (1.50) (1.33) (1.18) (1.04) (1.05)
-------- -------- -------- -------- --------
Net asset value at end of year $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26
======== ======== ======== ======== ========
Market price at end of year $ 12.938 $ 13.313 $ 11.250 $ 10.875 $ 8.500
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 19.8% 26.6% 21.7% 31.8% (0.8)%
Based on market price 9.1% 34.4% 16.2% 41.4% (14.9)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 1,351 $ 1,150 $ 988 $ 872 $ 710
Ratio of expenses to average net assets (d) 1.00% 1.01% 1.03% 1.06% 1.07%
Ratio of net investment income to
average net assets (d) 0.39% 0.38% 0.73% 0.92% 1.16%
Portfolio turnover rate 76% 99% 70% 54% 44%
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offerings for shares at a price below net asset
value.
(c) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(d) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
See Notes to Financial Statements.
36
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003
I. ORGANIZATION
Liberty All-Star Equity Fund (the "Fund"), is a Massachusetts business trust
registered under the Investment Company Act of 1940 (the "Act"), as amended, as
a diversified, closed-end management investment company.
INVESTMENT GOAL
The Fund seeks total investment return comprised of long-term capital
appreciation and current income through investing primarily in a diversified
portfolio of equity securities.
FUND SHARES
The Fund may issue an unlimited number of shares of beneficial interest.
II. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
SECURITY VALUATION
Equity securities are valued at the last sale price at the close of the
principal exchange on which they trade. Unlisted securities or listed securities
for which there were no sales during the day are valued at the closing bid price
on such exchanges or over-the-counter markets.
Debt securities generally are valued by a pricing service approved by the
Fund's Board of Trustees (the "Board"), based upon market transactions for
normal, institutional-sized trading units of similar securities. The services
may use various pricing techniques, which will take into account appropriate
factors such as yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other data, as well as broker quotes. Debt securities for
which quotes are readily available are valued at an over-the-counter or exchange
bid quotation.
Short-term debt obligations maturing in more than 60 days for which market
quotations are readily available are valued at current market value. Short-term
debt obligations maturing within 60 days are valued at amortized cost, which
approximates market value.
Investments for which market quotations are not readily available are valued
at fair value as determined in good faith under consistently applied procedures
approved by and under the general supervision of the Board.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is
determined and gains (losses) are based upon the specific identification method
for both financial statement and federal income tax purposes.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment advisor has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis. Premium and discount are
amortized and accreted, respectively, on all debt securities. Corporate actions
and dividend income are recorded on the ex-date.
FEDERAL INCOME TAX STATUS
Consistent with the Fund's policy to qualify as a regulated investment company
and to distribute all of its taxable income to shareholders, no federal income
tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund currently has a policy of paying distributions on its shares of
beneficial interest totaling approximately 10% of its net asset value per year.
The distributions are payable in four quarterly distributions of 2.5% of the
Fund's net asset value at the close of the New York Stock Exchange on the Friday
prior to each quarterly declaration date. Distributions to shareholders are
recorded on ex-date.
37
III. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2003, permanent differences resulting
primarily from differing treatments for foreign currency transactions, return of
capital and excess distributions were identified and reclassified among the
components of the Fund's net assets as follows:
UNDISTRIBUTED NET ACCUMULATED
INVESTMENT INCOME NET REALIZED LOSS PAID-IN CAPITAL
----------------- ----------------- ---------------
$ 48 $ 7,255,354 $ (7,255,402)
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
The tax character of distributions paid during the years ended December 31,
2003 and December 31, 2002 was as follows:
12/31/03 12/31/02
-------- --------
Distributions paid from:
Ordinary income* $ 9,756,164 $ 1,038,036
Long-term capital gain 28,334,312 2,485,163
------------- -------------
38,090,476 3,523,199
Return of capital 53,106,588 75,181,165
------------- -------------
$ 91,197,064 $ 78,704,364
*For tax purposes short-term capital gains distributions, if any, are considered
ordinary income distributions.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM NET UNREALIZED
INCOME CAPITAL GAINS APPRECIATION*
-------------- -------------- --------------
$ -- $ -- $ 107,675,073
*The differences between book-basis and tax-basis net unrealized appreciation
are primarily due to deferral of losses from wash sales.
Capital loss carryforwards are available to reduce taxable income arising
from future net realized gains on investments, if any, to the extent permitted
by the Internal Revenue Code. As of December 31, 2003, the Fund had no capital
loss carryforwards.
Future realized gains offset by the loss carryforwards are not required to be
distributed to shareholders. However, under the Fund's distribution policy, as
described above, such gains may be distributed to shareholders in the year gains
are realized. Any such gains distributed may be taxable to shareholders as
ordinary income. Capital loss carryforwards of $7,255,400 were utilized during
the year ended December 31, 2003.
IV. FEES AND COMPENSATION PAID TO AFFILIATES
INVESTMENT ADVISORY FEE
Liberty Asset Management Company ("LAMCO"), a wholly owned subsidiary of
Columbia Management Group, Inc. ("Columbia"), which is a wholly owned subsidiary
of FleetBoston Financial Corporation, is the investment advisor of the Fund.
LAMCO receives a monthly fee based on the Fund's average weekly net assets at
the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $400 million 0.800%
Next $400 million 0.720%
Next $400 million 0.648%
Over $1.2 billion 0.584%
For the year ended December 31, 2003, the Fund's effective investment advisory
fee rate was 0.74%.
Under Portfolio Manager Agreements, LAMCO pays each Portfolio Manager a
portfolio management fee based on the assets of the investment portfolio that
they manage. The portfolio management fee is paid from the investment advisory
fees collected by LAMCO and is based on the Fund's average weekly net assets at
the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $400 million 0.400%
Next $400 million 0.360%
Next $400 million 0.324%
Over $1.2 billion 0.292%
38
ADMINISTRATION FEE
LAMCO provides administrative and other services for a monthly fee based on the
Fund's average weekly net assets at the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $400 million 0.200%
Next $400 million 0.180%
Next $400 million 0.162%
Over $1.2 billion 0.146%
For the year ended December 31, 2003, the Fund's effective administration fee
rate was 0.19%.
PRICING AND BOOKKEEPING FEES
LAMCO is responsible for providing pricing and bookkeeping services to the Fund
under a pricing and bookkeeping agreement. Under a separate agreement (the
"Outsourcing Agreement"), LAMCO has delegated those functions to State Street
Corporation ("State Street"). LAMCO pays the total fees collected from the Fund
for the services to State Street under the Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, LAMCO receives
from the Fund an annual flat fee of $10,000 paid monthly, and in any month that
the Fund's average weekly net assets exceed $50 million, an additional monthly
fee. The additional fee rate is calculated by taking into account the fees
payable to State Street under the Outsourcing Agreement. This rate is applied to
the average daily net assets of the Fund for that month. The Fund also pays
additional fees for pricing services. For the year ended December 31, 2003, the
effective pricing and bookkeeping fee rate was 0.023%.
CUSTODY CREDITS
The Fund has an agreement with its custodian bank under which custody fees may
be reduced by balance credits. The Fund could have invested a portion of the
assets utilized in connection with the expense offset arrangement in an income
producing asset if it had not entered into such an agreement.
FEES PAID TO OFFICERS
The Fund pays no compensation to its officers, all of whom are employees of
Columbia or its affiliates.
V. PORTFOLIO INFORMATION
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2003, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $607,262,547 and
$660,193,599, respectively.
VI. CAPITAL TRANSACTIONS
In a rights offering commencing April 5, 2002, shareholders exercised rights to
purchase 10,688,506 shares at $8.99 per share for proceeds, net of expenses, of
$95,753,976. During the years ended December 31, 2003 and December 31, 2002,
distributions in the amount of $38,881,100 and $36,519,053, respectively, were
paid in newly issued shares valued at market value or net asset value, but not
less than 95% of market value. Such distributions resulted in the issuance of
4,584,918 and 4,491,951 shares, respectively.
VII. SUBSEQUENT EVENT: RIGHTS OFFERING
On February 10, 2004, the Board authorized and set the terms of an offering to
the Fund's shareholders of rights to purchase additional shares of the Fund.
Shareholders would be issued non-transferable rights entitling them to
subscribe for one additional share for every ten shares held, with the right to
subscribe for additional shares not subscribed for by others in the primary
subscription. The subscription price per share will be 95 percent of the lower
of the last reported sale price on the New York Stock Exchange or the net asset
value on the business day following the expiration of the subscription period.
The rights offering is subject to the effectiveness of the Fund's
Registration statement to be filed with the Securities and Exchange Commission
and will be made only by means of a prospectus. The Fund anticipates that the
offering will commence in April 2004 and will continue for approximately 30
days.
39
REPORT OF INDEPENDENT AUDITORS
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, 2003, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion 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 the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2003 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 10, 2004
40
AUTOMATIC DIVIDEND REINVESTMENT & CASH PURCHASE PLAN (UNAUDITED)
Under the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to participate and have all their Fund dividends
and distributions automatically reinvested by EquiServe Trust Company, N.A., as
agent for participants in the Plan (the "Plan Agent"), in additional shares of
the Fund. For further information and enrollment forms, call Investor Assistance
at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 a.m. and 5 p.m. Eastern
Time.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee can participate in the Plan only if their brokerage firm, bank or
nominee is able to do so on their behalf. Shareholders participating in the Plan
through a brokerage firm may not be able to transfer their shares to another
brokerage firm and continue to participate in the Plan.
Under the Plan, distributions declared payable in shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional shares valued at the lower of market value or net
asset value per share on the valuation date for the distribution (but not at a
discount of more than 5 percent from market price). Distributions declared
payable only in cash will be reinvested for the accounts of participants in the
Plan in additional shares purchased by the Plan Agent on the open market at
prevailing market prices. If, prior to the Plan Agent's completion of such open
market purchases, the market price of a share equals or exceeds its net asset
value, the remainder of the distribution will be paid in newly issued shares
valued at net asset value (but not at a discount of more than 5% from market
price). Dividends and distributions are subject to taxation, whether received in
cash or in shares.
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in shares of the Fund purchased
on the open market. These voluntary cash payments will be invested on or shortly
after the 15th day of each calendar month, and voluntary payments should be sent
so as to be received by the Plan Agent no later than five business days before
the next investment date. Barring suspension of trading, voluntary cash payments
will be invested within 45 days of receipt. A participant may withdraw a
voluntary cash payment by written notice received by the Plan Agent at least 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There is no charge to participants for reinvesting distributions pursuant to
the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written notice
to the Plan Agent, EquiServe Trust Company, N.A., P.O. Box 43010, Providence, RI
02940-3010. Such termination will be effective immediately if received not less
than 10 days prior to the record date for a dividend or distribution; otherwise
it will be effective on the first business day after the payment date of such
dividend or distribution. On termination, participants may either have
certificates for the Fund shares in their Plan accounts delivered to them or
have the Plan Agent sell such shares in the open market and deliver the
proceeds, less a $2.50 fee plus brokerage commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
41
TAX INFORMATION (UNAUDITED)
All 2003 distributions whether received in cash or shares of the Fund consist of
the following:
(1) ordinary dividends
(2) long-term capital gains and
(3) return of capital
Below is a table that details the breakdown of each 2003 distribution for
federal income tax purposes.
TAX STATUS OF 2003 DISTRIBUTIONS
ORDINARY DIVIDENDS LONG-TERM
AMOUNT --------- ------------- CAPITAL RETURN OF
DATE PAID PER SHARE QUALIFIED NON-QUALIFIED GAINS CAPITAL
*01/02/03 $0.19 9.07% -- 32.42% 58.51%
-------------------------------------------------------------------------------------------------------------
03/17/03 $0.17 9.07% -- 32.42% 58.51%
-------------------------------------------------------------------------------------------------------------
06/30/03 $0.19 9.07% -- 32.42% 58.51%
-------------------------------------------------------------------------------------------------------------
10/06/03 $0.20 9.07% -- 32.42% 58.51%
-------------------------------------------------------------------------------------------------------------
**01/02/04 $0.22 -- -- -- --
-------------------------------------------------------------------------------------------------------------
100% of the Long-Term Capital Gains distributions are from post-May 5 Capital
Gains.
*Pursuant to Section 852 of the Internal Revenue Code, the taxability of this
distribution will be reported on the Form 1099-DIV for 2003.
**Pursuant to Section 852 of the Internal Revenue Code, the taxability of this
distribution will be reported on the Form 1099-DIV for 2004.
FOR CORPORATE SHAREHOLDERS
100% of the ordinary income distributed by the Fund for the year ended December
31, 2003, qualifies for the corporate dividends received deduction.
42
TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Liberty All-Star Equity Fund, the
date each was first elected or appointed to office, their term of office, their
principal business occupations and other directorships they have held during at
least the last five years, are shown below.
NUMBER OF
POSITION TERM OF PORTFOLIOS IN
WITH LIBERTY OFFICE AND FUND COMPLEX OTHER
NAME (AGE) ALL-STAR LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN DIRECTORSHIPS
AND ADDRESS EQUITY FUND SERVICE DURING PAST FIVE YEARS BY TRUSTEE HELD
DISINTERESTED TRUSTEES
John A. Benning (69) Trustee Trustee Retired since December, 1999; 2 TT International USA
c/o Liberty Asset Since 2002; Senior Vice President, General (investment company)
Management Company Term expires Counsel and Secretary, Liberty
One Financial Center 2005 Financial Companies Inc. (July,
Boston, MA 02111 1985 to December, 1999); Vice
President, Secretary and
Director, Liberty Asset
Management Company (August, 1985
to December, 1999).
James E. Grinnell (74) Trustee Trustee Since Private investor since November 2 None
c/o Liberty Asset 1986; Term 1988; President and Chief
Management Company Expires 2005 Executive Officer, Distribution
One Financial Center Management Systems, Inc. (1983
Boston, MA 02111 to May 1986); Senior Vice
President, Operations, The
Rockport Company (importer and
distributor of shoes) (May 1986
to November 1988).
Richard W. Lowry (67) Trustee Trustee Since Private Investor since 1987 121 None
c/o Liberty Asset 1986; Term (formerly Chairman and Chief
Management Company Expires 2004 Executive Officer, U.S. Plywood
One Financial Center Corporation (building products
Boston, MA 02111 manufacturer).
John J. Neuhauser (60) Trustee Trustee Since Academic Vice President and Dean 122 Saucony, Inc. (athletic
c/o Liberty Asset 1998; Term of Faculties since August 1999, footwear) and SkillSoft
Management Company Expires 2004 Boston College (formerly Dean, Corp. (e-learning)
One Financial Center Boston College School of
Boston, MA 02111 Management from September 1977
to September 1999).
INTERESTED TRUSTEE
William E. Mayer* (63) Trustee Trustee Since Managing Partner, Park Avenue 121 Lee Enterprises (print
c/o Liberty Asset 1998; Term Equity Partners (private equity) media); WR Hambrecht
Management Company Expires 2006 since February 1999 (formerly + Co (financial service
One Financial Center Founding Partner, Development provider); First Health
Boston, MA 02111 Capital, LLC from November 1996 (healthcare).
to February 1999).
*A TRUSTEE WHO IS AN "INTERESTED PERSON" (AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940 ("1940 ACT")) OF LIBERTY ALL-STAR EQUITY FUND OR LAMCO.
MR. MAYER IS AN INTERESTED PERSON BY REASON OF HIS AFFILIATION WITH WR HAMBRECHT
+ CO.
43
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED
NAME (AGE) AND ADDRESS EQUITY FUND TO OFFICE PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
OFFICERS
William R. Parmentier, Jr. (51) President and 1998 President (since June 1998) and Chief Investment
Liberty Asset Management Company Chief Executive Officer (since April 1995), Senior Vice President
One Financial Center Officer (May 1995 to June 1998), Liberty Asset
Boston, MA 02111 Management.
Mark T. Haley, CFA (39) Vice President 1999 Vice President-Investments (since January 1999),
Liberty Asset Management Company Director of Investment Analysis (December 1996 to
One Financial Center December 1998), Investment Analyst (January 1994
Boston, MA 02111 to November 1996), Liberty Asset Management.
Fred H. Wofford (48) Vice President 2003 Director of Funds Operations (since March 2003),
Liberty Asset Management Company Liberty Asset Management (formerly Director of
One Financial Center Investment Compliance, Deutsche Asset Management
Boston, MA 02111 from February 1999 to March 2003; Manager of Fund
Administration, BankBoston 1784 Funds from
November 1995 to February 1999)
J. Kevin Connaughton (39) Treasurer 2000 Treasurer of the Columbia Funds and of the
One Financial Center Liberty All-Star Funds since December 2000
Boston, MA 02111 (formerly Controller of the Columbia Funds and of
the Liberty All-Star Funds from February 1998 to
October 2000); Vice President of Columbia
Management Advisors, Inc. since April 2003;
Treasurer of the Galaxy Funds since September
2002; Treasurer of the Columbia Management
Multi-Strategy Hedge Fund, LLC since December
2002 (formerly Vice President of Colonial
Management Associates, Inc. from February 1998 to
October 2000; Senior Tax Manager, Coopers &
Lybrand, LLP from April 1996 to January 1998).
Vicki Benjamin (42) Chief 2001 Controller of the Columbia Funds and Liberty
One Financial Center Accounting All-Star Funds since June 2002; Chief Accounting
Boston, MA 02111 Officer and Officer of the Columbia Funds and Liberty
Controller All-Star Funds since June 2001; Controller and
Chief Accounting Officer of the Galaxy Funds
since September 2002 (formerly Vice President,
Corporate Audit, State Street Bank and Trust
Company from May 1998 to April 2001; Audit
Manager from July 1994 to June 1997, Senior Audit
Manager from July 1997 to May 1998, Coopers &
Lybrand LLP).
David A. Rozenson (49) Secretary 2003 Secretary of the Columbia Funds and of the
One Financial Center Liberty All-Star Funds since December 2003;
Boston, MA 02111 Senior Counsel of FleetBoston Financial
Corporation since January 1996; Associate General
Counsel of Columbia Management Group since
November 2002.
44
[GRAPHIC]
[ALL STAR(R) EQUITY FUND LOGO]
LIBERTY ASSET MANAGEMENT COMPANY,
FUND MANAGER
ONE FINANCIAL CENTER
BOSTON, MASSACHUSETTS 02111
617-772-3626
www.all-starfunds.com
[USA LISTED NYSE LOGO]
[CLOSED-END FUND ASSOCIATION, INC. LOGO]
WWW.CLOSED-ENDFUNDS.COM
IMAGE OF THE NEW YORK STOCK EXCHANGE
FACADE USED WITH PERMISSION OF NYSE.
MULTI-MANAGEMENT
[GRAPHIC]
CLOSED-END STRUCTURE
[GRAPHIC]
PROFESSIONAL MANAGEMENT
[GRAPHIC]
ACCESS TO LEADING INVESTMENT MANAGERS
[GRAPHIC]
ONGOING MONITORING AND REBALANCING
[GRAPHIC]
DISTRIBUTION POLICY
[GRAPHIC]
LIBERTY ALL-STAR EQUITY FUND
ITEM 2. CODE OF ETHICS.
(a) The registrant has, as of the end of the period covered by this
report, adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(b) During the period covered by this report, there were not any
amendments to a provision of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were not any waivers
or implicit waivers to a provision of the code of ethics adopted in
2(a) above.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Audit Committee is composed of three of the registrant's
independent directors who are not affiliated with the registrant's investment
adviser. The Board has determined that each of the audit committee members
is "financially literate" and that at least one member has "accounting or
related financial management expertise" as used in the New York Stock
Exchange definitions of the terms.
Under the recently enacted Sarbanes-Oxley Act, if the Board of
Directors has not determined that a "financial expert," a new term based on
criteria contained in the Sarbanes-Oxley Act, is serving on the audit
committee, it must disclose this fact and explain why the committee does not
have such an expert. The Board of Directors has determined that none of the
members of its audit committee meets the technical requirements of the
definition. Moreover, it believes that for the following reasons it is not
necessary for a registered investment company such as the registrant, with an
audit committee that meets the New York Stock Exchange requirements of
financial literacy, to have a "financial expert" as a member of the committee.
1. The financial statements of and accounting principles applying to
registered investment companies such as the registrant are relatively
straightforward and transparent compared to those of operating
companies. The significant accounting issues are valuation of
securities and other assets (regulated under the Investment Company Act
of 1940 (the "1940 Act") and computed daily), accrual of expenses,
allocation of joint expenses shared with other entities, such as
insurance premiums, and disclosures of all related party transactions.
Equally important is a knowledge of the tax laws applying to registered
investment companies. None of the accounting issues involving
corporate America that have received recent publicity, such as
sophisticated derivative transactions and special purpose entities,
are present in financial reporting for registered investment companies.
2. During the years that the registrant has been filing financial reports
under the 1940 Act since its inception in 1986 there has never been a
requirement for a financial report or statement to be restated.
3. The current members of the audit committee have many years of aggregate
experience serving on this audit committee and in the Board's judgment,
through this experience and experience with other public corporation's
financial affairs, they have an understanding of the relevant generally
accepted accounting principles governing the registrant's financial
statements, tax laws applying to the registrant, the registrant's
internal accounting controls and audit committee functions necessary to
satisfy the objectives of the Sarbanes-Oxley Act with respect to the
financial statements, auditing process and internal controls of the
registrant.
4. The audit committee has the capability of employing a consultant who
satisfies the technical definition of a "financial expert" and will
do so from time to time if circumstances warrant.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
4(a) Aggregate Audit Fees billed to the registrant by the principal accountant
for professional services rendered during the fiscal years ended December 31,
2003 and December 31, 2002 are as follows:
2003 2002
$33,000 $36,100
Audit Fees include amounts related to the audit of the registrant's annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
(b) Aggregate Audit-Related Fees billed to the registrant by the principal
accountant for professional services rendered during the fiscal years ended
December 31, 2003 and December 31, 2002 are as follows:
2003 2002
$4,000 $2,000
Audit-Related Fees include amounts for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported in Audit Fees
above. In fiscal year 2003, Audit-Related Fees relate to certain agreed-upon
procedures performed for semi-annual shareholder reports. Audit-Related Fees in
fiscal year 2002 relate to certain agreed-upon procedures conducted during the
conversion of the registrant's accounting system.
The "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X became effective on May 6, 2003. The percentage of Audit-Related
services to the registrant that were approved under the "de minimis" exception
during the fiscal years ended December 31, 2003 and December 31, 2002 are as
follows:
2003 2002
0% N/A
The pre-approval requirements for services to the investment adviser (not
including any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser) and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the registrant under paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X became effective on May 6, 2003. During the fiscal year
ended December 31, 2003, there were no Audit-Related Fees that were approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
The percentage of Audit-Related fees required to be approved under paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X that were approved under the "de
minimis" exception during the fiscal years ended December 31, 2003 and December
31, 2002 are as follows:
2003 2002
0% N/A
(c) Aggregate Tax Fees billed to the registrant by the principal accountant for
professional services rendered during the fiscal years ended December 31, 2003
and December 31, 2002 are as follows:
2003 2002
$2,600 $2,600
Tax Fees include amounts for professional services by the principal accountant
for tax compliance, tax advice and tax planning. Tax Fees in both fiscal years
2003 and 2002 relate to the review of annual tax returns.
The "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X became effective on May 6, 2003. The percentage of Tax Fees
billed to the registrant that were approved under the "de minimis" exception
during the fiscal years ended December 31, 2003 and December 31, 2002 are as
follows:
2003 2002
0% N/A
The pre-approval requirements for services to the investment adviser (not
including any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser) and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the registrant under paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X became effective on May 6, 2003. During the fiscal year
ended December 31, 2003, there were no Tax Fees that were approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
The percentage of Tax Fees required to be approved under paragraph (c)(7)(ii) of
Rule 2-01 of Regulation S-X that were approved under the "de minimis" exception
during the fiscal years ended December 31, 2003 and December 31, 2002 are as
follows:
2003 2002
0% N/A
(d) Aggregate All Other Fees billed to the registrant by the principal
accountant for professional services rendered during the fiscal years ended
December 31, 2003 and December 31, 2002 are as follows:
2003 2002
$0 $0
All Other Fees include amounts for products and services provided by the
principal accountant, other than the services reported in (a)-(c) above.
The "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X became effective on May 6, 2003. The percentage of All Other Fees
billed to the registrant that were approved under the "de minimis" exception
during the fiscal years ended December 31, 2003 and December 31, 2002 are as
follows:
2003 2002
0% N/A
The pre-approval requirements for services to the investment adviser (not
including any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser) and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the registrant under paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X became effective on May 6, 2003. During the fiscal year
ended December 31, 2003, there were no All Other Fees that were approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
The percentage of All Other Fees required to be approved under paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X that were approved under the "de
minimis" exception during the fiscal years ended December 31, 2003 and
December 31, 2002 are as follows:
2003 2002
0% N/A
(e)(1) Audit Committee Pre-Approval Policies and Procedures
I. GENERAL OVERVIEW
The Audit Committee of the registrant has adopted a formal policy (the "Policy")
which sets forth the procedures and the conditions pursuant to which the Audit
Committee will pre-approve (i) all audit and non-audit (including audit related,
tax and all other) services provided by the registrant's independent auditor to
the registrant and individual funds (collectively "Fund Services"), and (ii) all
non-audit services provided by the registrant's independent auditor to the
funds' adviser or a control affiliate of the adviser, that relate directly to
the funds' operations and financial reporting (collectively "Fund-related
Adviser Services"). A "control affiliate" is an entity controlling, controlled
by, or under common control with the adviser that provides ongoing services to
the funds, and the term "adviser" is deemed to exclude any unaffiliated
sub-adviser whose role is primarily portfolio management and is sub-contracted
or overseen by another investment adviser.
The Audit Committee uses a combination of specific (on a case-by-case basis as
potential services are contemplated) and general (pre-determined list of
permitted services) pre-approvals. Unless a type of service has received general
pre-approval, it will require specific pre-approval by the Audit Committee if it
is to be provided by the independent auditor.
The Policy does not delegate the Audit Committee's responsibilities to
pre-approve services performed by the independent auditor to management.
II. GENERAL PROCEDURES
On an annual basis, the Fund Treasurer and/or Director of Trustee Administration
shall submit to the Audit Committee a schedule of the types of Fund Services and
Fund-related Adviser Services that are subject to general pre-approval.
These services will provide a description of each type of service that is
subject to general pre-approval and, where possible, will provide projected fees
for each instance of providing each service. This general pre-approval and
related fees (where provided) will generally cover the period from July 1
through June 30 of the following year. The Audit Committee will review and
approve the types of services and review the projected fees for the next fiscal
year and may add to, or subtract from, the list of general pre-approved services
from time to time, based on subsequent determinations. This approval
acknowledges that the Audit Committee is in agreement with the specific types of
services that the independent auditor will be permitted to perform. The fee
amounts will be updated to the extent necessary at other regularly scheduled
meetings of the Audit Committee.
In addition to the fees for each individual service, the Audit Committee has the
authority to implement a fee cap on the aggregate amount of non-audit services
provided to an individual fund.
If, subsequent to general pre-approval, a fund, adviser or control affiliate
determines that it would like to engage the independent auditor to perform a
service not included in the general pre-approval list, the specific pre-approval
procedure shall be as follows:
- A brief written request shall be prepared by management detailing the
proposed engagement with explanation as to why the work is proposed to
be performed by the independent auditor;
- The request should be addressed to the Audit Committee with copies to
the Fund Treasurer and/or Director of Trustee Administration;
- The Fund Treasurer and/or Director of Trustee Administration will
arrange for a discussion of the service to be included on the agenda
for the next regularly scheduled Audit Committee meeting, when the
Committee will discuss the proposed engagement and approve or deny the
request.
- If the timing of the project is critical and the project needs to
commence before the next regularly scheduled meeting, the Chairperson
of the Audit Committee may approve or deny the request on behalf of
the Audit Committee, or, in the Chairperson's discretion, determine to
call a special meeting of the Audit Committee for the purpose of
considering the proposal. Should the Chairperson of the Audit
Committee be unavailable, any other member of the Audit Committee may
serve as an alternate for the purpose of approving or denying the
request. Discussion with the Chairperson (or alternate, if necessary)
will be arranged by the Fund Treasurer and/or Director of Trustee
Administration. The independent auditor will not commence any such
project unless and until specific approval has been given.
III. ADDITIONAL PRE-APPROVAL INFORMATION
The engagement of the independent auditor to provide Fund Services and
Fund-related Adviser Services shall be approved by the Audit Committee prior to
the commencement of any such engagement.
A. AUDIT SERVICES TO THE FUNDS
The Audit Committee will monitor the Audit services engagement throughout the
year and will also approve, if necessary, any changes in terms and conditions
resulting from changes in audit scope, fund structure or other items.
B. AUDIT-RELATED SERVICES TO THE FUNDS
The Audit Committee believes that the provision of Audit-related Services is
consistent with the SEC's rules on auditor independence, and will grant general
pre-approval to specific Audit-related Services.
C. TAX SERVICES TO THE FUNDS
The Audit Committee will grant general pre-approval to those specific Tax
services that have historically been provided by the auditor, that the Audit
Committee has reviewed and believes would not impair the independence of the
auditor, and that are consistent with the SEC's rules on auditor independence.
D. ALL OTHER SERVICES TO THE FUNDS
The Audit Committee will grant general pre-approval to those specific
permissible non-audit services classified as All Other Services that it believes
are routine and recurring services, would not impair the independence of the
auditor and are consistent with the SEC's rules on auditor independence.
E. FUND-RELATED ADVISER SERVICES
The Audit Committee will grant general pre-approval to provide specific
non-audit services to the funds' investment adviser, or any control affiliates,
that relate directly to the funds' operations and financial statements. This
includes services customarily required by one or more adviser entities or
control affiliates in the ordinary course of their operations.
F. CERTAIN OTHER SERVICES PROVIDED TO ADVISER ENTITIES
The Audit Committee recognizes that there are cases where services proposed to
be provided by the independent auditor to the adviser or control affiliates are
not Fund-related Adviser Services within the meaning of the Policy, but
nonetheless may be relevant to the Audit Committee's ongoing evaluation of the
auditor's independence and objectivity with respect to its audit services to the
funds. As a result, in all cases where an adviser or control affiliate engages
the independent auditor to provide audit or non-audit services that are not Fund
Services or Fund-related Adviser Services, were not subject to pre-approval by
the Audit Committee, and the projected fees for any such engagement (or the
aggregate of all such engagements) exceeds a pre-determined
threshold established by the Audit Committee, the independent auditor, Fund
Treasurer and/or Director of Trustee Administration will notify the Audit
Committee not later than its next meeting. Such notification shall include a
general description of the services provided, the entity that is to be the
recipient of such services, the timing of the engagement, the entity's reasons
for selecting the independent auditor, and the projected fees. Such information
will allow the Audit Committee to consider whether non-audit services provided
to the adviser and Adviser Entities, which were not subject to Audit Committee
pre-approval, are compatible with maintaining the auditor's independence.
IV. REPORTING TO THE AUDIT COMMITTEE
The Fund Treasurer or Director of Trustee Administration shall report to the
Audit Committee at each of its regular meetings regarding all Fund Services or
Fund-related Adviser Services initiated since the last such report was rendered,
including:
- A general description of the services, and
- Actual billed and projected fees, and
- The means by which such Fund Services or Fund-related Adviser Services
were approved by the Audit Committee.
In addition, in accordance with Section 208-5 of the Sarbanes-Oxley Act of 2002,
the independent auditor shall report to the Audit Committee annually, and no
more than 90 days prior to the filing of audit reports with the SEC, all
non-audit services provided to entities in the funds' "investment company
complex," as defined by SEC rules. In addition, the independent auditor must
annually disclose to the Audit Committee all relationships with the funds of
which the independent auditor is aware that may be reasonably thought to bear on
the auditor's independence. The independent auditor shall tabulate, calculate
and disclose its fees annually for such relationships.
V. AMENDMENTS; ANNUAL APPROVAL BY AUDIT COMMITTEE
The Policy may be amended from time to time by the Audit Committee. Prompt
notice of any amendments will be provided to the independent auditor, Fund
Treasurer and Director of Trustee Administration. The Policy shall be reviewed
and approved at least annually by the Audit Committee.
(f) Not applicable.
(g) All non-audit fees billed by the registrant's accountant for services
rendered to the registrant for the fiscal years ended December 31, 2003 and
December 31, 2002 are disclosed in 4(b)-(d) above.
All non-audit fees billed by the registrant's accountant for services rendered
to the registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser) and any entity controlling, controlled by, or under
common control with the
adviser that provides ongoing services to the registrant for the fiscal years
ended December 31, 2003 and December 31, 2002 are also disclosed in 4(b)-(d)
above. There were no such fees during the last two fiscal years.
(h) The registrant's Audit Committee of the Board of Directors has considered
whether the provision of non-audit services that were rendered to the
registrant's adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X, is compatible with maintaining the principal accountant's
independence. The Audit Committee determined that the provision of such services
is compatible with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. RESERVED.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Fund has delegated to Liberty Asset Management Company (the "Advisor")
the responsibility to vote proxies relating to portfolio securities held by
the Fund. In deciding to delegate this responsibility to the Advisor, the
Board of Trustees of the Trust reviewed and approved the policies and
procedures adopted by the Advisor. These included the procedures that the
Advisor follows when a vote presents a conflict between the interests of the
Fund and its shareholders and the Advisor, its affiliates, its other clients
or other persons.
The Advisor's policy is to vote all proxies for Fund securities in a manner
considered by the Advisor to be in the best interest of the Fund and its
shareholders without regard to any benefit to the Advisor, its affiliates, its
other clients or other persons. The Advisor examines each proposal and votes
against the proposal, if, in its judgment, approval or adoption of the proposal
would be expected to impact adversely the current or potential market value of
the issuer's securities. The Advisor also examines each proposal and votes the
proxies against the proposal, if, in its judgment, the proposal would be
expected to affect adversely the best interest of the Fund. The Advisor
determines the best interest of the Fund in light of the potential economic
return on the Fund's investment.
The Advisor addresses potential material conflicts of interest by having
predetermined voting guidelines. For those proposals that require special
consideration or in instances where special circumstances may require varying
from the predetermined guideline, the Advisor's Proxy Committee determines the
vote in the best interest of the Fund, without consideration of any benefit to
the Advisor, its affiliates, its other clients or other persons. A member of the
Proxy Committee is prohibited from voting on any proposal for which he or she
has a conflict of interest by reason of a direct relationship with the issuer or
other party affected by a given proposal. Persons making recommendations to the
Proxy Committee or its members are required to
disclose to the Committee any relationship with a party making a proposal or
other matter known to the person that would create a potential conflict of
interest.
The Advisor has three classes of proxy proposals. The first two classes are
predetermined guidelines to vote for or against specific proposals, unless
otherwise directed by the Proxy Committee. The third class is for proposals
given special consideration by the Proxy Committee. In addition, the Proxy
Committee considers requests to vote on proposals in the first two classes other
than according to the predetermined guidelines.
The Advisor generally votes in favor of proposals related to the following
matters: selection of auditors (unless the auditor receives more than 50% of its
revenues from non-audit activities from the company and its affiliates),
election of directors (unless the proposal gives management the ability to alter
the size of the board without shareholder approval), different persons for
chairman of the board /chief executive officer (unless, in light of the size of
the company and the nature of its shareholder base, the role of chairman and CEO
are not held by different persons), compensation (if provisions are consistent
with standard business practices), debt limits (unless proposed specifically as
an anti-takeover action), indemnifications (unless for negligence and or
breaches of fiduciary duty), meetings, name of company, principal office (unless
the purpose is to reduce regulatory or financial supervision), reports and
accounts (if the certifications required by Sarbanes-Oxley Act of 2002 have been
provided), par value, shares (unless proposed as an anti-takeover action), share
repurchase programs, independent committees, and equal opportunity employment.
The Advisor generally votes against proposals related to the following matters:
super majority voting, cumulative voting, preferred stock, warrants, rights,
poison pills, reclassification of common stock and meetings held by written
consent.
The Advisor gives the following matters special consideration: new proposals,
proxies of investment company shares (other than those covered by the
predetermined guidelines), mergers/acquisitions (proposals where a hostile
merger/acquisition is apparent or where the Advisor represents ownership in more
than one of the companies involved), shareholder proposals (other than those
covered by the predetermined guidelines), executive/director compensation (other
than those covered by the predetermined guidelines), pre-emptive rights and
proxies of international issuers which block securities sales between submission
of a proxy and the meeting (proposals for these securities are voted only on the
specific instruction of the Proxy Committee and to the extent practicable in
accordance with predetermined guidelines).
In addition, if a portfolio manager or other party involved with a client of the
Advisor or Fund account concludes that the interest of the client or Fund
requires that a proxy be voted on a proposal other than according to the
predetermined guidelines, he or she may request that the Proxy Committee
consider voting the proxy differently. If any person (or entity) requests the
Proxy Committee (or any of its members) to vote a proxy other than according to
a predetermined guideline, that person must furnish to the Proxy Committee a
written explanation of the reasons for the request and a description of the
person's (or entity's) relationship with the party proposing the matter to
shareholders or any other matter known to the person (or entity) that would
create a potential conflict of interest.
The Proxy Committee may vary from the predetermined guideline if it determines
that voting on the proposal according to the predetermined guideline would be
expected to impact adversely the current or potential market value of the
issuer's securities or to affect adversely the best interest of the client.
References to the best interest of a client refer to the interest of the client
in terms of
the potential economic return on the client's investment. In determining the
vote on any proposal, the Proxy Committee does not consider any benefit other
than benefits to the owner of the securities to be voted.
The Advisor's Proxy Committee is composed of operational and investment
representatives of its regional offices as well as senior representatives of the
Advisor's equity investments, equity research, compliance and legal functions.
During the first quarter of each year, the Proxy Committee reviews all
guidelines and establishes guidelines for expected new proposals. In addition to
these reviews and its other responsibilities described above, its functions
include annual review of its Proxy Voting Policy and Procedures to ensure
consistency with internal policies and regulatory agency policies, and
development and modification of voting guidelines and procedures as it deems
appropriate or necessary.
The Advisor uses Institutional Shareholder Services ("ISS"), a third party
vendor, to implement its proxy voting process. ISS provides proxy analysis,
record keeping services and vote disclosure services.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable at this time.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable at this time.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer, based on their evaluation of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing of
this report, have concluded that such controls and procedures are
adequately designed to ensure that information required to be
disclosed by the registrant in Form N-CSR is accumulated and
communicated to the registrant's management, including the principal
executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR
attached hereto as Exhibit 99.CODE ETH
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable at this time.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Liberty All-Star Equity Fund
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By (Signature and Title) /s/ William R. Parmentier, Jr.
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William R. Parmentier, Jr., President
Date March 5, 2004
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ William R. Parmentier, Jr.
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William R. Parmentier, Jr., President
Date March 5, 2004
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By (Signature and Title) /s/ J. Kevin Connaughton
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J. Kevin Connaughton, Treasurer
Date March 5, 2004
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