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
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Liberty All-Star Equity Fund
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(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)
Vincent Pietropaolo, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3698
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Date of fiscal year end: 12/31/04
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Date of reporting period: 06/30/04
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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. REPORTS TO STOCKHOLDERS.
[GRAPHIC]
SECOND QUARTER REPORT - JUNE 30, 2004
[ALL STAR(R) EQUITY FUND LOGO]
Q2
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
LIBERTY ALL-STAR EQUITY FUND
FUND STATISTICS AND PERFORMANCE 2ND QUARTER 2004 YEAR-TO-DATE
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Period End Net Asset Value (NAV) -- $9.17
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Period End Market Price -- $9.21
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Period End Premium -- 0.4%
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Distributions $0.22 $0.46
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Market Price Trading Range $8.26 to $10.49 $8.26 to $10.49
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Premium Range 0.2% to 13.6% 0.2% to 13.6%
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Shares Valued at NAV 2.6% 5.6%
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Shares Valued at NAV
with Dividends Reinvested 2.6% 5.6%
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Shares Valued at Market Price
with Dividends Reinvested (6.4)% 2.3%
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Lipper Large-Cap Core
Mutual Fund Average 0.9% 2.0%
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S&P 500 Index 1.7% 3.4%
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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.
ON THE COVER
THE PHOTOGRAPHS NEXT TO LADY LIBERTY'S TORCH SYMBOLIZE THE FUND'S UNIQUE
ATTRIBUTES THAT WERE DESCRIBED IN THE FUND'S 2003 ANNUAL REPORT.
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: JULY 2004
The stock market posted a modest advance during the second quarter, as the S&P
500 Index gained 1.7 percent during the period. The gain duplicated the index's
1.7 percent advance in the first quarter, bringing its first half return to 3.4
percent. The S&P 500 declined in April, but gained ground in May and June to
conclude the half.
The quarter was marked by the prospect of higher interest rates, rising oil
prices, fears surrounding the handover of power in Iraq and concerns over a
slowdown in global economic growth. All contributed to sluggishness in share
prices. With this uncertainty as a backdrop, small cap stocks underperformed
large cap stocks; energy stocks advanced, and financial stocks declined owing to
concerns over higher interest rates. Stocks have experienced a broad based
decline thus far in July as the market has failed to overcome the aforementioned
concerns.
On the positive side, the economy continued to expand and corporate earnings
continued to rise. During the quarter, the government reported a 4.4 percent
rise in first quarter GDP, up from the solid 4.1 percent pace registered in the
fourth quarter of 2003. By the time all reports are in, year-over-year second
quarter corporate earnings are expected to be ahead by more than 20 percent for
the fourth quarter in a row--a rare event.
We continued to see a gradual rotation toward higher quality stocks--those
companies that exhibit sustainable earnings growth, strong balance sheets and
solid cash flow. However, for the entire first half the lowest quality stocks
still narrowly outperformed the highest quality ones. In terms of style, value
outperformed growth across the board--large, mid and small-cap--during the first
half.
Liberty All-Star Equity Fund posted a generally positive quarter. With
shares valued at net asset value (NAV) with dividends reinvested, the Fund
gained 2.6 percent. This result topped the S&P 500 Index and was ahead of the
Fund's primary benchmark, the Lipper Large-Cap Core Mutual Fund Average, which
advanced 0.9 percent. For the first half, the Fund gained 5.6 percent with
shares valued at NAV with dividends reinvested. By comparison, the S&P 500
Index, as mentioned, gained 3.4 percent for the half, while the Lipper Large-Cap
Core Mutual Fund Average advanced 2.0 percent.
The sole reversal for the quarter was a 6.4 percent decline in the market
value of Fund shares with dividends reinvested. This was in sharp contrast to
the solid NAV
1
investment performance. During the quarter, the premium at which Fund shares
traded above NAV reached a high of 13.6 percent which, history shows, was
unsustainably high. By quarter-end, the Fund continued to trade at a modest
premium to NAV, and its market price return for the first half was on the
positive side at 2.3 percent.
Long term, the Fund continues to perform well. The Fund ranks in the top 20
percent of funds in the Lipper Large-Cap Core Mutual Fund universe since the
Fund's first full calendar year of operation, more than 17 years ago. One-,
three- and five-year Fund returns are all in the top 5 percent of that Lipper
universe.
In other Fund news, the offering to shareholders of rights to purchase
additional shares of the Fund was completed successfully. The offering, which
allowed investors to subscribe for one additional share for each 10 shares
owned, was oversubscribed. In accord with previously announced terms of the
offering, the number of shares offered was increased by an additional 25 percent
to cover a portion of the over-subscription requests. This brought the total
value of the offering to approximately $132 million. We at Liberty Asset
Management Company (LAMCO) are gratified by this response, and thank
shareholders for their confidence in the Fund.
We invite you to read the interview with investment manager Arnold Schneider
of Schneider Capital Management beginning on page 8. This is the first interview
of this manager since we introduced him to Fund shareholders in the first
quarter report of 2002. We believe you'll find his comments to be interesting
and insightful.
Once again, we at LAMCO thank shareholders for their ongoing support of the
Fund. We believe that the Fund is properly structured with a quality team of
investment managers, giving us confidence as we move into the future.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
2
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S ASSETS ARE EQUALLY DISTRIBUTED AMONG
THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:
[CHART]
MASTRAPASQUA ASSET GROWTH/Companies whose valuations do not reflect the
MANAGEMENT, INC. potential for accelerated earnings and cash flow growth.
TCW INVESTMENT GROWTH/Companies that have superior sales growth,
MANAGEMENT COMPANY leading and/or rising market shares, and high and/or
rising profit margins.
MATRIX ASSET ADVISORS, VALUE/Companies that are financially strong and trade
INC. below their enterprise value.
PZENA INVESTMENT VALUE/Companies with low price-to-normalized earnings
MANAGEMENT, LLC ratios that have the ability to generate earnings
recovery.
SCHNEIDER CAPITAL VALUE/Companies that are overlooked and undervalued
MANAGEMENT where the firm expects a rebound in earnings.
MANAGERS' DIFFERING INVESTMENT STYLES ARE
REFLECTED IN PORTFOLIO CHARACTERISTICS:
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of a
multi-managed portfolio. The characteristics are different for each of the
Fund's five investment managers. These differences are a reflection of the fact
that each pursues a different investment style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Stock Index.
INVESTMENT STYLE SPECTRUM
PORTFOLIO CHARACTERISTICS VALUE GROWTH
AS OF JUNE 30, 2004
(UNAUDITED) [GRAPHIC]
MASTRA- TOTAL S&P
SCHNEIDER PZENA MATRIX PASQUA TCW FUND 500 INDEX
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Number of Holdings 60 35 36 40 26 168* 500
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Percent of Holdings in Top 10 36% 42% 37% 34% 58% 17% 22%
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Weighted Average Market
Capitalization (billions) $ 17 $ 43 $ 81 $ 35 $ 55 $ 45 $ 90
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Average Five-Year
Earnings Per Share Growth 1% 11% 5% 8% 26% 11% 9%
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Dividend Yield 1.1% 2.0% 1.6% 0.4% 0.3% 1.1% 1.7%
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Price/Earnings Ratio 19x 13x 18x 28x 29x 19x 19x
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Price/Book Value Ratio 2.4x 2.6x 3.3x 4.6x 6.7x 3.9X 4.0x
*Certain holdings are held by more than one manager.
3
INVESTMENT GROWTH AS OF JUNE, 2004
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the growth of a $10,000 investment assuming the
purchase of shares of beneficial interest at the closing market price (NYSE:
USA) of $6.00 on December 31, 1987, and tracking its progress through June 30,
2004. This covers the period since the Fund commenced its 10 percent
distribution policy in 1988.
[CHART]
BOTTOM TOP
PLOT PLOT
POINTS POINTS
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31-Dec-87 $10,000.00 $0.00
31-Jan-88 $11,666.67 $0.00
29-Feb-88 $11,666.67 $0.00
31-Mar-88 $11,316.67 -$1.32
30-Apr-88 $10,900.00 -$3.74
31-May-88 $10,900.00 -$3.74
30-Jun-88 $12,066.67 $1.61
31-Jul-88 $11,858.34 -$5.56
31-Aug-88 $11,441.67 -$19.91
30-Sep-88 $12,400.00 $7.17
31-Oct-88 $12,191.67 -$6.05
30-Nov-88 $12,608.34 $20.40
31-Dec-88 $13,150.00 $50.20
31-Jan-89 $13,358.34 $69.45
28-Feb-89 $12,733.34 $11.68
31-Mar-89 $13,308.34 $48.90
30-Apr-89 $13,933.34 $126.92
31-May-89 $14,350.00 $178.93
30-Jun-89 $14,541.67 $190.51
31-Jul-89 $14,958.34 $256.86
31-Aug-89 $15,583.34 $356.39
30-Sep-89 $15,791.67 $379.16
31-Oct-89 $15,375.00 $298.26
30-Nov-89 $15,791.67 $379.16
31-Dec-89 $16,400.00 $492.68
31-Jan-90 $15,775.00 $349.82
28-Feb-90 $15,983.34 $397.43
31-Mar-90 $16,141.67 $426.64
30-Apr-90 $15,933.34 $371.99
31-May-90 $16,975.00 $645.27
30-Jun-90 $17,183.34 $684.99
31-Jul-90 $17,183.34 $684.99
31-Aug-90 $15,725.00 $248.19
30-Sep-90 $15,466.67 $151.74
31-Oct-90 $15,883.34 $292.87
30-Nov-90 $16,300.00 $434.01
31-Dec-90 $17,066.67 $686.26
31-Jan-91 $17,483.34 $842.27
28-Feb-91 $19,150.00 $1,466.30
31-Mar-91 $19,983.34 $1,777.03
30-Apr-91 $20,191.67 $1,862.77
31-May-91 $21,233.34 $2,291.40
30-Jun-91 $20,608.34 $2,024.65
31-Jul-91 $20,608.34 $2,024.65
31-Aug-91 $21,041.67 $2,190.00
30-Sep-91 $22,083.34 $2,697.12
31-Oct-91 $21,875.00 $2,595.70
30-Nov-91 $21,891.67 $2,564.52
31-Dec-91 $23,766.67 $3,548.04
31-Jan-92 $23,766.67 $3,548.04
29-Feb-92 $24,633.34 $4,037.35
31-Mar-92 $23,800.00 $3,567.46
30-Apr-92 $23,800.00 $3,699.54
31-May-92 $24,216.67 $3,937.63
30-Jun-92 $24,041.67 $3,829.68
31-Jul-92 $25,083.34 $4,467.01
31-Aug-92 $24,891.67 $4,366.57
30-Sep-92 $24,266.67 $3,958.93
31-Oct-92 $24,683.34 $4,230.69
30-Nov-92 $25,966.67 $5,080.08
31-Dec-92 $26,175.01 $5,224.57
31-Jan-93 $25,966.67 $5,080.09
28-Feb-93 $26,175.01 $5,224.58
31-Mar-93 $26,216.67 $5,273.59
30-Apr-93 $26,000.01 $5,113.98
31-May-93 $26,850.01 $5,779.70
30-Jun-93 $26,641.67 $5,617.23
31-Jul-93 $26,850.01 $5,779.68
31-Aug-93 $27,508.34 $6,317.91
30-Sep-93 $27,300.01 $6,146.17
31-Oct-93 $27,508.34 $6,441.37
30-Nov-93 $27,750.01 $6,675.71
31-Dec-93 $28,258.34 $7,121.90
31-Jan-94 $28,258.34 $7,121.90
28-Feb-94 $28,066.67 $6,976.50
31-Mar-94 $26,816.67 $5,781.64
30-Apr-94 $27,650.01 $6,578.22
31-May-94 $28,066.67 $7,019.42
30-Jun-94 $27,233.34 $6,181.99
31-Jul-94 $27,441.67 $6,391.35
31-Aug-94 $27,441.67 $6,406.67
30-Sep-94 $27,233.34 $6,374.45
31-Oct-94 $26,608.34 $5,706.82
30-Nov-94 $25,966.67 $5,045.74
31-Dec-94 $25,550.01 $4,576.35
31-Jan-95 $25,966.67 $5,045.76
28-Feb-95 $26,991.67 $6,158.91
31-Mar-95 $27,825.01 $7,142.06
30-Apr-95 $28,033.34 $7,387.85
31-May-95 $28,033.34 $7,333.37
30-Jun-95 $28,866.67 $8,361.45
31-Jul-95 $29,075.01 $8,618.47
31-Aug-95 $29,733.34 $9,418.54
30-Sep-95 $29,941.67 $9,687.66
31-Oct-95 $29,941.67 $9,687.66
30-Nov-95 $30,825.01 $10,804.18
31-Dec-95 $31,241.67 $11,367.01
31-Jan-96 $31,450.01 $11,648.42
29-Feb-96 $31,658.34 $11,929.86
31-Mar-96 $32,558.34 $13,139.74
30-Apr-96 $32,141.67 $12,552.06
31-May-96 $32,225.01 $12,683.61
30-Jun-96 $32,016.67 $12,375.77
31-Jul-96 $30,766.67 $10,528.64
31-Aug-96 $32,483.34 $13,039.13
30-Sep-96 $32,900.01 $13,681.13
31-Oct-96 $33,108.34 $14,002.14
30-Nov-96 $33,833.34 $15,119.21
31-Dec-96 $34,050.01 $15,468.24
31-Jan-97 $34,675.01 $16,493.83
28-Feb-97 $35,091.67 $17,177.55
31-Mar-97 $35,416.67 $17,680.44
30-Apr-97 $35,625.01 $18,036.96
31-May-97 $37,200.01 $20,690.20
30-Jun-97 $37,929.17 $21,987.19
31-Jul-97 $38,970.84 $23,840.02
31-Aug-97 $39,137.51 $24,077.79
30-Sep-97 $40,491.67 $26,581.84
31-Oct-97 $38,616.67 $23,114.71
30-Nov-97 $39,704.17 $25,133.28
31-Dec-97 $40,304.17 $26,286.62
31-Jan-98 $40,408.34 $26,495.09
28-Feb-98 $41,658.34 $28,996.70
31-Mar-98 $42,450.01 $30,568.38
30-Apr-98 $41,825.01 $29,271.83
31-May-98 $41,191.67 $28,496.95
30-Jun-98 $42,129.18 $30,546.09
31-Jul-98 $41,816.68 $29,863.01
31-Aug-98 $37,383.34 $19,989.37
30-Sep-98 $39,258.34 $24,261.45
31-Oct-98 $39,779.17 $25,448.16
30-Nov-98 $41,700.01 $29,861.81
31-Dec-98 $42,012.51 $30,601.70
31-Jan-99 $41,908.34 $30,355.07
28-Feb-99 $41,595.84 $29,615.19
31-Mar-99 $42,370.84 $31,418.74
30-Apr-99 $42,891.68 $32,697.64
31-May-99 $43,300.01 $33,660.12
30-Jun-99 $44,550.01 $36,850.10
31-Jul-99 $44,133.34 $35,786.75
31-Aug-99 $42,720.84 $32,192.34
30-Sep-99 $41,783.34 $29,707.43
31-Oct-99 $42,408.34 $31,364.06
30-Nov-99 $41,725.01 $29,635.55
31-Dec-99 $41,204.17 $28,195.89
31-Jan-00 $40,891.67 $27,332.13
29-Feb-00 $40,683.34 $26,756.30
31-Mar-00 $41,962.51 $30,286.59
30-Apr-00 $41,962.51 $30,286.59
31-May-00 $42,666.68 $32,068.95
30-Jun-00 $44,437.51 $37,356.45
31-Jul-00 $44,854.18 $38,600.61
31-Aug-00 $46,200.01 $42,645.12
30-Sep-00 $46,408.34 $43,291.03
31-Oct-00 $46,095.84 $42,322.09
30-Nov-00 $45,133.34 $39,227.62
31-Dec-00 $45,758.34 $41,238.90
31-Jan-01 $47,633.34 $47,272.73
28-Feb-01 $47,266.68 $46,314.98
31-Mar-01 $46,100.01 $42,423.19
30-Apr-01 $47,583.34 $47,371.33
31-May-01 $47,866.68 $48,445.28
30-Jun-01 $48,033.34 $49,019.44
31-Jul-01 $47,133.34 $45,918.83
31-Aug-01 $46,466.68 $44,360.15
30-Sep-01 $44,416.68 $36,982.60
31-Oct-01 $45,216.68 $39,861.69
30-Nov-01 $45,883.34 $42,392.69
31-Dec-01 $45,616.68 $41,403.89
31-Jan-02 $46,000.01 $42,825.28
28-Feb-02 $45,883.34 $42,382.35
31-Mar-02 $45,883.34 $42,382.35
30-Apr-02 $44,200.01 $35,961.30
31-May-02 $44,266.68 $37,182.75
30-Jun-02 $42,250.01 $29,132.59
31-Jul-02 $40,550.01 $22,346.56
31-Aug-02 $41,183.34 $24,972.59
30-Sep-02 $39,266.67 $17,059.87
31-Oct-02 $40,000.01 $20,087.35
30-Nov-02 $41,083.34 $24,656.19
31-Dec-02 $39,666.67 $18,612.41
31-Jan-03 $40,150.01 $20,674.42
28-Feb-03 $39,966.67 $19,834.56
31-Mar-03 $40,100.01 $20,420.64
30-Apr-03 $41,116.67 $24,889.50
31-May-03 $42,333.34 $30,209.75
30-Jun-03 $42,950.01 $32,999.28
31-Jul-03 $43,733.34 $36,542.77
31-Aug-03 $43,616.68 $35,997.72
30-Sep-03 $43,583.34 $35,842.61
31-Oct-03 $45,283.34 $43,752.83
30-Nov-03 $45,633.34 $45,513.88
31-Dec-03 $45,666.68 $45,673.69
31-Jan-04 $46,266.68 $48,549.64
29-Feb-04 $47,033.34 $52,393.52
31-Mar-04 $47,100.01 $52,722.97
30-Apr-04 $47,183.34 $53,134.75
31-May-04 $45,783.34 $46,252.79
30-Jun-04 $46,016.68 $47,440.13
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 $46,017 (this
value includes distributions per share totaling $18.40 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 allowed shareholders to purchase additional shares at a
discount. The value of the investment under this scenario grew to $93,457.
4
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS
RIGHTS OFFERINGS
---------------------------------------------
SHARES NEEDED
PER SHARE MONTH TO PURCHASE ONE SUBSCRIPTION TAX
YEAR DISTRIBUTIONS COMPLETED ADDITIONAL SHARE PRICE CREDITS*
1988 $ 0.64
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1989 0.95
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1990 0.90
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1991 1.02
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1992 1.07 April 10 $ 10.05
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1993 1.07 October 15 10.41 0.18
---------------------------------------------------------------------------------------
1994 1.00 September 15 9.14
---------------------------------------------------------------------------------------
1995 1.04
---------------------------------------------------------------------------------------
1996 1.18 0.13
---------------------------------------------------------------------------------------
1997 1.33 0.36
---------------------------------------------------------------------------------------
1998 1.40 April 20 12.83
---------------------------------------------------------------------------------------
1999 1.39
---------------------------------------------------------------------------------------
2000 1.42
---------------------------------------------------------------------------------------
2001 1.20
---------------------------------------------------------------------------------------
2002 0.88 May 10 8.99
---------------------------------------------------------------------------------------
2003 0.78
---------------------------------------------------------------------------------------
2004
1st Quarter 0.24
2nd Quarter 0.22
---------------------------------------------------------------------------------------
*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.
5
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 6/30/04 OF 3/31/04 SECURITY NAME VALUE ($000) NET ASSETS
1 1 The Boeing Co. $ 26,642 2.3%
2 2 Genentech, Inc. 23,064 2.0
3 4 Intel Corp. 21,520 1.8
4 5 Morgan Stanley 21,221 1.8
5 16 Bank of America Corp. 20,419 1.7
6 3 The Progressive Corp. 19,799 1.7
7 18 Yahoo! Inc. 18,096 1.5
8 14 Amazon.com, Inc. 17,218 1.5
9 6 Citigroup, Inc. 15,997 1.4
10 8 Freddie Mac 15,168 1.3
11 25 eBay, Inc. 15,061 1.3
12 10 Baxter International, Inc. 14,762 1.3
13 7 Amgen, Inc. 14,630 1.2
14 12 Cisco Systems, Inc. 14,374 1.2
15 15 The Gap, Inc. 14,017 1.2
16 21 Tyco International Ltd. 13,803 1.2
17 30 Loews Corp. 13,606 1.2
18 9 Applied Materials, Inc. 13,564 1.2
19 20 CIT Group, Inc. 13,097 1.1
20 17 Novellus Systems, Inc. 12,711 1.1
21 24 General Electric Co. 12,237 1.0
22 22 American International Group, Inc. 12,128 1.0
23 29 Hewlett-Packard Co. 11,552 1.0
24 34 Bristol-Myers Squibb Co. 11,498 1.0
25 26 Network Appliance, Inc. 11,219 1.0
26 23 Merrill Lynch & Co., Inc. 11,120 0.9
27 28 Sara Lee Corp. 11,010 0.9
28 33 Maxim Integrated Products, Inc. 10,919 0.9
29 13 Liberty Media Corp., Class A 10,375 0.9
30 27 Aon Corp. 10,360 0.9
31 38 QUALCOMM, Inc. 10,115 0.9
32 95 MetLife, Inc. 10,104 0.9
33 35 Computer Associates International, Inc. 9,980 0.8
34 39 Starwood Hotels & Resorts Worldwide, Inc. 9,874 0.8
35 40 The Walt Disney Co. 9,559 0.8
36 43 ConocoPhillips 9,180 0.8
37 59 Whirlpool Corp. 8,767 0.7
38 37 Symantec Corp. 8,756 0.7
39 44 BP p.l.c. 8,506 0.7
40 74 Reliant Energy, Inc. 8,381 0.7
41 50 Dell, Inc. 8,335 0.7
42 11 CIGNA Corp. 8,092 0.7
43 51 MedImmune, Inc. 7,839 0.7
44 19 J.C. Penney Co., Inc. 7,752 0.7
45 41 Pfizer, Inc. 7,713 0.7
46 48 XM Satellite Radio Holdings, Inc., Class A 7,646 0.7
47 42 Xilinx, Inc. 7,635 0.6
48 99 Union Pacific Corp. 7,586 0.6
49 68 CVS Corp. 7,538 0.6
50 93 Johnson Controls, Inc. 7,461 0.6
6
MAJOR STOCK CHANGES IN THE SECOND 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 second
quarter of 2004.
SHARES AS
SECURITY NAME PURCHASES (SALES) OF 6/30/04
PURCHASES
Adobe Systems, Inc. 135,000 135,000
HCA, Inc. 122,250 122,250
MetLife, Inc. 129,850 281,850
Morgan Stanley 84,000 402,150
SALES
AT&T Wireless Services, Inc. (442,700) 285,575
BellSouth Corp. (334,425) 0
CIGNA Corp. (128,225) 117,600
CONSOL Energy, Inc. (189,375) 0
Expeditors International of Washington, Inc. (116,000) 0
Kerr-McGee Corp. (112,100) 0
Manpower, Inc. (98,600) 0
Monsanto Co. (123,175) 0
J.C. Penney Co., Inc. (150,450) 205,300
PG&E Corp. (165,650) 178,450
7
MANAGER INTERVIEW
PHOTO OF ARNOLD C. SCHNEIDER, III
ARNOLD C. SCHNEIDER, III
President and Chief Investment Officer
Schneider Capital Management Corporation
WHEN A STOCK IS OUT OF FAVOR, IT MIGHT FIND A FRIEND IN SCM--IF THERE'S REASON
TO ANTICIPATE A REBOUND IN FUNDAMENTALS
SCHNEIDER CAPITAL MANAGEMENT (SCM) IS A VALUE STYLE MANAGER PRACTICING A
DISCIPLINED FUNDAMENTAL APPROACH TO ADD VALUE OVER TIME. A RESEARCH-INTENSIVE
MANAGER, SCM 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. RECENTLY, WE HAD THE
OPPORTUNITY TO SPEAK WITH ARNOLD C. SCHNEIDER, III, CFA, THE FIRM'S FOUNDER,
PRESIDENT AND CHIEF INVESTMENT OFFICER.
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE PORTFOLIO MANAGER'S POSITION
AT THE TIME OF THE DISCUSSION (JULY 2004) AND ARE SUBJECT TO CHANGE.
LAMCO: THE LAST TIME WE SPOKE IN DEPTH FOR A SHAREHOLDER REPORT WAS IN THE FIRST
QUARTER OF 2002, AND THAT WAS ALSO YOUR FIRST INTERVIEW FOR LIBERTY ALL-STAR
EQUITY FUND. AS A REFRESHER AND FOR THE BENEFIT OF NEW FUND SHAREHOLDERS, TELL
US A LITTLE ABOUT SCM.
SCHNEIDER: We started Schneider Capital Management in 1996. We're located in
Wayne, Pennsylvania, and the firm is 100 percent employee owned. We have about
$3 billion in total assets under management. Our clients are mostly
institutions, including corporations, endowments, foundations and public
retirement systems.
As to our investment philosophy, it's one of deep value. We focus on
companies that are out-of-favor in the marketplace but that, in our assessment,
have the ability to repair their current performance and return to former levels
of earnings. We generally expect to see improvement in these companies'
fundamentals around a year after their purchase. SCM has a solid research
foundation focused on new idea generation, and we believe in managing relatively
concentrated portfolios that are focused on the best ideas our research process
can produce.
LAMCO: You describe Schneider Capital Management as "research intensive." Given
that many, if not most, managers use or rely on research, what is unique or
differentiating about SCM's research?
SCHNEIDER: For one thing, we try to
[SIDENOTE]
"WE FOCUS ON COMPANIES THAT ARE OUT-OF-FAVOR IN THE MARKETPLACE BUT THAT...HAVE
THE ABILITY TO REPAIR THEIR CURRENT PERFORMANCE AND RETURN TO FORMER LEVELS OF
EARNINGS."
8
focus on the future. Spending time on the past or present simply isn't
productive because all of that is already fully discounted in the marketplace.
We also try to be relatively efficient by focusing only on those elements of a
company's business that will ultimately drive its profitability. Finally, ours
is very much a hands-on process. We're quite independent, we have our own point
of view and we don't rely on quantitative research or computer screens.
LAMCO: YOUR "SCM VALUE CYCLE" ILLUSTRATES YOUR PHILOSOPHY QUITE WELL. WOULD YOU
DESCRIBE IT FOR US?
SCHNEIDER: There are five phases to the SCM value cycle--reject, consider, buy,
hold and sell.
Taking them in order, the "reject" stage is what's sometimes called the
"value trap" stage. That's when a company's stock appears to be cheap but really
isn't, either because earnings are unsustainably high or because the industry is
about to undergo secular change that's going to cause returns to permanently
decline. The "consider" stage is the reject stage after some of the negative
elements have been disseminated in the marketplace. At this point, the stock is
even cheaper. The negative cards have been turned over and it's now obvious that
company fundamentals are deteriorating and the stock is now out of favor and
completely friendless. No one is recommending it. We wouldn't buy in the
consider stage, however, until we feel that there's a bottom and the
fundamentals are no longer declining. That's the point when we move into the
"buy" stage--when the stock is undervalued but the fundamentals have at least
stopped deteriorating. We aren't necessarily looking for an immediate first leg
up. But, we do expect the fundamentals to begin to improve over the ensuing
year. The "hold" stage phases in as the fundamentals are starting to turn up.
The stock price may be higher, but mostly fundamentals are getting better.
Typically, however, the kinds of companies that we own still have a long way to
go at this stage, so we let our winners run and we hold our stocks in this
category. Ultimately, we move into the "sell" stage either because the stock
hits our price target or because the positive fundamentals have now run their
course and aren't going to get any better.
LAMCO: IS THERE SUCH A THING AS A TYPICAL HOLDING PERIOD?
SCHNEIDER: We really don't have a typical holding period. If we miss on a stock
and it turns out to be a loser, we will hold it for a very short period of time.
On the other hand, we will hold some of our winners for five years or longer. If
pressed, I would say that our successful investments most often fall into the
three- to four-year timeframe.
LAMCO: INVESTORS READ AND HEAR A LOT ABOUT MACRO FACTORS THESE DAYS. THEY
INCLUDE INFLATION, HIGHER INTEREST RATES, HIGH OIL PRICES, PRESIDENTIAL POLITICS
AND GEOPOLITICAL TENSIONS. TO WHAT EXTENT DO YOU FACTOR TOP-DOWN CONCERNS INTO
YOUR THINKING, OR ARE YOU STRICTLY BOTTOM-UP?
SCHNEIDER: We do use macro factors to provide a framework for our
decision-making, but macro factors don't play a
[SIDENOTE]
"...WE BELIEVE IN MANAGING RELATIVELY CONCENTRATED PORTFOLIOS THAT ARE FOCUSED
ON THE BEST IDEAS OUR RESEARCH PROCESS CAN PRODUCE."
9
significant role in our stock selection process. We're primarily a bottom-up
stock picker. We mostly use macro factors to keep us away from certain areas as
opposed to guiding us towards areas for investment.
LAMCO: EARLIER, YOU MENTIONED YOUR BELIEF IN CONCENTRATED PORTFOLIOS WHERE YOU
CAN LET YOUR BEST IDEAS IMPACT OVERALL PERFORMANCE. CAN YOU DESCRIBE A TYPICAL
SCHNEIDER PORTFOLIO?
SCHNEIDER: We usually have 50 to 60 stocks, with the top 10 holdings
representing one-third of the market value of the portfolio. We have industry
and sector weightings that are often meaningfully different from a large cap
value benchmark, such as the Russell 1000 Value Index. We're not trying to
replicate benchmarks because we don't closet index. We let bottom-up decisions
lead us to our weightings.
LAMCO: YOU PRACTICE A RIGOROUS SELL DISCIPLINE. CAN YOU SUMMARIZE IT FOR US?
SCHNEIDER: I already mentioned two of the ways we sell: when a stock reaches its
target price or when the fundamentals begin to deteriorate. A third way would be
if a new idea has better investment potential versus an older idea that may not
necessarily have reached its target but has lower potential than the new one.
So, we would trim the existing holding to make room for the new one. The other
scenario is just a matter of portfolio construction--if there's a certain
industry exposure that becomes too great or if a single position just becomes
too large. We don't want any single holding to exceed 5 percent of the portfolio
at cost or 8 percent of the portfolio at market value.
LAMCO: CATCH US UP ON HOW, IN GENERAL, VALUE PERFORMED THROUGH 2003 AND THE
FIRST HALF OF 2004.
SCHNEIDER: Two thousand three was a pretty broad-based rally, so growth and
value did fairly similarly. This year, the value indices have resumed their
outperformance of the earlier years of the decade, mostly because tech stocks
have lagged and they are more widely represented in the growth indices.
LAMCO: AND HOW IS THAT INFLUENCED BY CAPITALIZATION IN TERMS OF LARGE CAP,
MID-CAP AND SMALL CAP? IS THAT PRETTY MUCH TRUE ACROSS THE BOARD?
SCHNEIDER: Yes, it has just been an unbelievable five- to six-year period...
very consistent beginning in late 1998. Small caps have beat mid-caps, which
have beat large caps. We have been favorably disposed towards small cap stocks,
but their terrific outperformance over mid-caps and the mid-caps' outperformance
over large caps has narrowed the valuation gap. So, at least from a valuation
standpoint, the gap has been closed, although the market can sometimes carry
that beyond where it should go.
LAMCO: PERHAPS WE COULD CLOSE BY ASKING YOU TO DESCRIBE A COUPLE OF STOCKS THAT
ARE IN THE PORTION OF THE LIBERTY ALL-STAR EQUITY FUND PORTFOLIO THAT YOU MANAGE
AND WHY THEY EXEMPLIFY THE SCM APPROACH TO INVESTING.
[SIDENOTE]
"...WE TRY TO FOCUS ON THE FUTURE. SPENDING TIME ON THE PAST OR PRESENT SIMPLY
ISN'T PRODUCTIVE BECAUSE ALL OF THAT IS ALREADY FULLY DISCOUNTED IN THE
MARKETPLACE."
10
SCHNEIDER: J. C. Penney has been one of our best stocks since we've been
managing for Liberty All-Star Equity Fund. It is a company that has been totally
transformed over the last two and one-half years under the leadership of
Chairman and CEO Allen Questrom. He has replaced virtually the entire executive
management of the company. It was a company that had become moribund and lost
its way--there was no vision or leadership. Questrom has brought in a plan and a
strategy and now the company has become a real leader, gaining market share
versus its competitors every year. Margins are in the process of moving from 2
percent in the department store division to the 6 to 7 percent range. It's just
a tremendous turnaround. The stock has more than doubled in a period where the
market has been relatively flat. This is a classic broken stock, not necessarily
a broken company. It has been completely revitalized under new leadership and is
now considered to be a very well run company. Now the stock is in favor, with a
couple of people recommending it when no one recommended it three years ago. So,
J.C. Penney is a stock that represents our style well.
LAMCO: WHERE DID QUESTROM COME FROM?
SCHNEIDER: He has a background with Federated Department Stores and Barney's, so
he has been in the retail business his whole career, and has a very strong track
record. Once again, he is achieving great results.
LAMCO: CAN YOU DESCRIBE ANOTHER STOCK?
SCHNEIDER: A second one would be Tyco International. Obviously, this is a
company that has been under a lot of press scrutiny, given the issues
surrounding former CEO Dennis Kozlowski, and it could be considered a
controversial stock. But, the fact is that it is a company with leadership
positions in most of its businesses and it generates strong free cash flow. The
old management was forced out under the scandal and Edward Breen came in from
Motorola to be chairman and CEO. He has a good reputation for operations, and
that's what the company needed because a lot of its divisions had lost their
way. And, even though the company had leadership positions in their industries,
many divisions were underperforming. Breen has instituted six sigma quality
programs and other initiatives to improve operations. Earnings were in the $1.25
range when we bought the stock and we believe that they should improve to over
$2 a share in the next couple of years. The stock has not jumped as much as J.
C. Penney but it has gone from the high teens to over $30 a share today. So, it
has been a good performer and, just like J. C. Penney, we think it has more
upside potential.
LAMCO: THANK YOU FOR ANOTHER INTERESTING INTERVIEW.
[SIDENOTE]
"...WE WILL HOLD SOME OF OUR WINNERS FOR FIVE YEARS OR LONGER. IF PRESSED, I
WOULD SAY THAT OUR SUCCESSFUL INVESTMENTS MOST OFTEN FALL INTO THE THREE- TO
FOUR-YEAR TIMEFRAME."
"WE'RE PRIMARILY A BOTTOM-UP STOCK PICKER. WE MOSTLY USE MACRO FACTORS TO KEEP
US AWAY FROM CERTAIN AREAS AS OPPOSED TO GUIDING US TOWARDS AREAS FOR
INVESTMENT."
11
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004 (UNAUDITED)
COMMON STOCKS (98.5%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (16.0%)
AUTO COMPONENTS (1.0%)
Johnson Controls, Inc. 139,775 $ 7,461,190
Visteon Corp. 402,975 4,702,718
---------------
12,163,908
---------------
AUTOMOBILES (0.4%)
Harley-Davidson, Inc. 72,900 4,515,426
---------------
HOTELS, RESTAURANTS & LEISURE (2.7%)
Carnival Corp. 147,850 6,948,950
International Game Technology 75,000 2,895,000
MGM Mirage (a) 50,000 2,347,000
Starbucks Corp. (a) 164,360 7,146,373
Starwood Hotels & Resorts Worldwide, Inc. 220,150 9,873,727
Wendy's International, Inc. 65,000 2,264,600
---------------
31,475,650
---------------
HOUSEHOLD DURABLES (1.1%)
Newell Rubbermaid, Inc. 175,150 4,116,025
Whirlpool Corp. 127,800 8,767,080
---------------
12,883,105
---------------
INTERNET & CATALOG RETAIL (2.7%)
Amazon.com, Inc. (a) 316,500 17,217,600
eBay, Inc. (a) 163,800 15,061,410
---------------
32,279,010
---------------
LEISURE EQUIPMENT & PRODUCTS (0.4%)
Brunswick Corp. 74,850 3,053,880
Mattel, Inc. 99,400 1,814,050
---------------
4,867,930
---------------
MEDIA (3.6%)
Comcast Corp., Class A (a) 79,000 2,181,190
Interpublic Group of Companies, Inc. (a) 203,000 2,787,190
Liberty Media Corp., Class A (a) 1,154,092 10,375,287
Liberty Media International, Inc., Class A (a) 74,660 2,769,886
Pixar, Inc. (a) 98,000 6,811,980
The Walt Disney Co. 375,000 9,558,750
XM Satellite Radio Holdings, Inc., Class A (a) 280,180 7,646,112
---------------
42,130,395
---------------
See Notes to Schedule of Investments.
12
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MULTI-LINE RETAIL (1.3%)
J.C. Penney Co., Inc. 205,300 $ 7,752,128
Kohl's Corp. (a) 61,600 2,604,448
Wal-Mart Stores, Inc. 90,500 4,774,780
---------------
15,131,356
---------------
SPECIALTY RETAIL (2.8%)
Circuit City Stores, Inc. 88,600 1,147,370
The Gap, Inc. 578,000 14,016,500
The Home Depot, Inc. 143,000 5,033,600
Office Depot, Inc. (a) 238,400 4,269,744
RadioShack Corp. 187,700 5,373,851
TJX Companies, Inc. 130,000 3,138,200
---------------
32,979,265
---------------
CONSUMER STAPLES (3.9%)
FOOD & STAPLES RETAILING (1.0%)
CVS Corp. 179,400 7,538,388
Walgreen Co. 123,200 4,461,072
---------------
11,999,460
---------------
FOOD PRODUCTS (2.6%)
Archer-Daniels-Midland Co. 145,450 2,440,651
General Mills, Inc. 128,700 6,117,111
Sara Lee Corp. 478,900 11,009,911
Smithfield Foods, Inc. (a) 140,525 4,131,435
Tate & Lyle PLC (b) 280,450 6,713,468
---------------
30,412,576
---------------
TOBACCO (0.3%)
Altria Group, Inc. 68,950 3,450,947
---------------
ENERGY (3.0%)
ENERGY EQUIPMENT & SERVICES (1.1%)
Halliburton Co. 140,000 4,236,400
Schlumberger Ltd. 60,000 3,810,600
Tidewater, Inc. 176,000 5,244,800
---------------
13,291,800
---------------
See Notes to Schedule of Investments.
13
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
OIL & GAS (1.9%)
BP p.l.c. (b) 158,775 $ 8,505,577
ConocoPhillips 120,325 9,179,594
Premcor, Inc. (a) 130,475 4,892,813
---------------
22,577,984
---------------
FINANCIALS (21.4%)
CAPITAL MARKETS (3.7%)
The Charles Schwab Corp. 683,620 6,569,588
Goldman Sachs Group, Inc. 45,000 4,237,200
Merrill Lynch & Co., Inc. 206,000 11,119,880
Morgan Stanley 402,150 21,221,456
---------------
43,148,124
---------------
COMMERCIAL BANKS (2.7%)
Bank of America Corp. (c) 241,305 20,419,229
Bank of New York Co., Inc. 212,000 6,249,760
Comerica, Inc. 86,750 4,760,840
---------------
31,429,829
---------------
DIVERSIFIED FINANCIAL SERVICES (2.9%)
CIT Group, Inc. 342,050 13,097,095
Citigroup, Inc. 344,025 15,997,163
J.P. Morgan Chase & Co. 144,100 5,586,757
---------------
34,681,015
---------------
INSURANCE (8.8%)
AFLAC, Inc. 173,700 7,088,697
Allstate Corp. 141,525 6,587,989
American International Group, Inc. 170,150 12,128,292
Aon Corp. 363,900 10,360,233
Genworth Financial, Inc., Class A (a) 182,900 4,197,555
Loews Corp. 226,925 13,606,423
Marsh & McLennan Companies, Inc. 92,000 4,174,960
MBIA, Inc. 83,225 4,753,812
MetLife, Inc. 281,850 10,104,322
The Progressive Corp. 232,105 19,798,556
Torchmark Corp. 97,575 5,249,535
XL Capital Ltd., Class A 77,100 5,817,966
---------------
103,868,340
---------------
See Notes to Schedule of Investments.
14
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
REAL ESTATE (0.9%)
CB Richard Ellis Group, Inc., Class A (a) 170,325 $ 3,253,208
Crescent Real Estate Equities Co. 236,125 3,806,335
The St. Joe Co. 101,475 4,028,557
---------------
11,088,100
---------------
THRIFTS & MORTGAGE FINANCE (2.4%)
Fannie Mae 97,700 6,971,872
Freddie Mac 239,625 15,168,262
The PMI Group, Inc. 79,150 3,444,608
Radian Group, Inc. 51,525 2,468,048
---------------
28,052,790
---------------
HEALTH CARE (15.3%)
BIOTECHNOLOGY (6.5%)
Affymetrix, Inc. (a) 177,000 5,793,210
Amgen, Inc. (a) 268,100 14,630,217
Biogen Idec, Inc. (a) 112,000 7,084,000
Cephalon, Inc. (a) 100,000 5,400,000
Genentech, Inc. (a) 410,400 23,064,480
Genzyme Corp. (a) 138,000 6,531,540
Invitrogen Corp. (a) 87,000 6,263,130
MedImmune, Inc. (a) 335,000 7,839,000
---------------
76,605,577
---------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.8%)
Alcon, Inc. 74,000 5,820,100
Baxter International, Inc. 427,750 14,761,653
Fisher Scientific International, Inc. (a) 120,000 6,930,000
Guidant Corp. 99,000 5,532,120
---------------
33,043,873
---------------
HEALTH CARE PROVIDERS & SERVICES (2.2%)
Aetna, Inc. 24,750 2,103,750
AmerisourceBergen Corp. 43,550 2,603,419
CIGNA Corp. 117,600 8,092,056
HCA, Inc. 122,250 5,084,377
McKesson Corp. 71,300 2,447,729
Tenet Healthcare Corp. (a) 389,300 5,220,513
---------------
25,551,844
---------------
See Notes to Schedule of Investments.
15
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
PHARMACEUTICALS (3.8%)
Bristol-Myers Squibb Co. 469,300 $ 11,497,850
Eli Lilly and Co. 104,800 7,326,568
Merck & Co., Inc. 149,000 7,077,500
Pfizer, Inc. 225,000 7,713,000
Teva Pharmaceutical Industries Ltd. (b) 55,000 3,700,950
Wyeth 190,000 6,870,400
---------------
44,186,268
---------------
INDUSTRIALS (9.7%)
AEROSPACE & DEFENSE (2.5%)
The Boeing Co. 521,475 26,642,158
Bombardier, Inc., Class B 942,450 2,830,730
---------------
29,472,888
---------------
AIR FREIGHT & LOGISTICS (1.0%)
FedEx Corp. 71,000 5,799,990
Ryder System, Inc. 136,000 5,449,520
---------------
11,249,510
---------------
AIRLINES (0.2%)
Southwest Airlines Co. 175,000 2,934,750
---------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Apollo Group, Inc., Class A (a) 58,400 5,156,136
Cendant Corp. 275,825 6,752,196
---------------
11,908,332
---------------
ELECTRICAL EQUIPMENT (0.6%)
American Power Conversion Corp. 355,000 6,975,750
---------------
INDUSTRIAL CONGLOMERATES (2.2%)
General Electric Co. 377,700 12,237,480
Tyco International Ltd. 416,500 13,802,810
---------------
26,040,290
---------------
MACHINERY (0.6%)
Navistar International Corp. (a) 170,900 6,624,084
---------------
ROAD & RAIL (1.6%)
CSX Corp. 186,150 6,100,136
Swift Transportation Co., Inc. (a) 92,550 1,661,273
See Notes to Schedule of Investments.
16
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
ROAD & RAIL (CONTINUED)
Union Pacific Corp. 127,600 $ 7,585,820
Werner Enterprises, Inc. 168,450 3,554,295
---------------
18,901,524
---------------
INFORMATION TECHNOLOGY (23.3%)
COMMUNICATIONS EQUIPMENT (2.9%)
Adaptec, Inc. (a) 475,000 4,018,500
Cisco Systems, Inc. (a) 606,500 14,374,050
Nokia Oyj (b) 370,000 5,379,800
QUALCOMM, Inc. 138,600 10,115,028
---------------
33,887,378
---------------
COMPUTERS & PERIPHERALS (3.5%)
Dell, Inc. (a) 232,700 8,335,314
EMC Corp. (a) 547,500 6,241,500
Hewlett-Packard Co. 547,475 11,551,722
Network Appliance, Inc. (a) 521,100 11,219,283
Sun Microsystems, Inc. (a) 931,200 4,041,408
---------------
41,389,227
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.6%)
Agilent Technologies, Inc. (a) 219,050 6,413,784
Avnet, Inc. (a) 296,275 6,725,442
Celestica, Inc. (a) 53,700 1,071,315
Jabil Circuit, Inc. (a) 206,000 5,187,080
Sanmina-SCI Corp. (a) 717,275 6,527,202
Symbol Technologies, Inc. 505,000 7,443,700
Vishay Intertechnology, Inc. (a) 185,000 3,437,300
Waters Corp. (a) 121,000 5,781,380
---------------
42,587,203
---------------
INTERNET SOFTWARE & SERVICES (1.5%)
Yahoo! Inc. (a) 498,100 18,095,973
---------------
IT SERVICES (0.6%)
BearingPoint, Inc. (a) 329,830 2,925,592
Electronic Data Systems Corp. 169,575 3,247,361
Ingram Micro, Inc., Class A (a) 38,300 554,201
---------------
6,727,154
---------------
See Notes to Schedule of Investments.
17
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.3%)
Analog Devices, Inc. 155,000 $ 7,297,400
Applied Materials, Inc. (a) 691,320 13,563,698
Intel Corp. 779,700 21,519,720
Maxim Integrated Products, Inc. 208,300 10,919,086
Micron Technology, Inc. (a) 184,300 2,821,633
Novellus Systems, Inc. (a) 404,300 12,711,192
ON Semiconductor Corp. (a) 213,150 1,070,013
Teradyne, Inc. (a) 90,350 2,050,945
Texas Instruments, Inc. 240,000 5,803,200
Xilinx, Inc. (a) 229,200 7,634,652
---------------
85,391,539
---------------
SOFTWARE (3.9%)
Adobe Systems, Inc. 135,000 6,277,500
Computer Associates International, Inc. 355,675 9,980,241
Microsoft Corp. 254,800 7,277,088
Oracle Corp. (a) 550,000 6,561,500
Symantec Corp. (a) 200,000 8,756,000
VERITAS Software Corp. (a) 264,000 7,312,800
---------------
46,165,129
---------------
MATERIALS (2.6%)
CHEMICALS (1.0%)
Bayer AG (b) 42,950 1,254,140
The Dow Chemical Co. 69,175 2,815,423
IMC Global, Inc. 551,425 7,389,095
---------------
11,458,658
---------------
METALS & MINING (0.7%)
Alcan, Inc. 113,675 4,706,145
Freeport-McMoRan Copper & Gold, Inc., Class B 91,686 3,039,391
---------------
7,745,536
---------------
PAPER & FOREST PRODUCTS (0.9%)
Abitibi Consolidated, Inc. 637,775 4,387,892
Domtar, Inc. 251,575 3,255,380
International Paper Co. 67,440 3,014,568
---------------
10,657,840
---------------
See Notes to Schedule of Investments.
18
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
TELECOMMUNICATION SERVICES (0.8%)
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
AT&T Wireless Services, Inc. (a) 285,575 $ 4,089,434
Nextel Communications, Inc., Class A (a) 80,875 2,156,127
Telephone and Data Systems, Inc. 46,275 3,294,780
---------------
9,540,341
---------------
UTILITIES (2.5%)
ELECTRIC UTILITIES (1.2%)
FirstEnergy Corp. 47,825 1,789,133
PG&E Corp. (a) 178,450 4,985,893
Wisconsin Energy Corp. 221,475 7,222,300
---------------
13,997,326
---------------
MULTI-UTILITIES & UNREGULATED POWER (1.3%)
NRG Energy, Inc. (a) 191,800 4,756,640
Reliant Resources, Inc. (a) 773,850 8,380,796
Scana Corp. 67,725 2,463,158
---------------
15,600,594
---------------
TOTAL COMMON STOCKS (COST OF $1,057,548,182) 1,159,165,598
---------------
CONVERTIBLE BONDS (0.1%) INTEREST MATURITY PAR
RATE DATE VALUE
INDUSTRIALS (0.1%)
AIRLINES (0.1%)
Delta Air Lines, Inc.
(Cost of $1,331,306) 8.00% 06/03/23 $ 1,808,000 1,021,466
---------
See Notes to Schedule of Investments.
19
SHORT-TERM INVESTMENT (1.6%) PAR VALUE MARKET VALUE
REPURCHASE AGREEMENT (1.6%)
Repurchase agreement with State Street Bank & Trust Co.,
dated 06/30/04, due 07/01/04 at 1.17%, collateralized by
U.S. Treasury Bonds & Notes with various maturities to 02/15/27,
market value $19,264,367 (Repurchase proceeds $18,865,613)
(Cost of $18,865,000) $ 18,865,000 $ 18,865,000
---------------
TOTAL INVESTMENTS (100.2%) (COST OF $1,077,744,488) (d) 1,179,052,064
---------------
OTHER ASSETS AND LIABILITIES, NET (-0.2%) (2,893,773)
---------------
NET ASSETS (100.0%) $ 1,176,158,291
---------------
NET ASSET VALUE PER SHARE (128,306,800 SHARES OUTSTANDING) $ 9.17
---------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Investments in affiliates during the six months ended June 30, 2004:
Security Name: FleetBoston Financial Corp., the parent company of the
Investment Advisor prior to April 1, 2004:
Shares as of 12/31/03: 200,000
Shares purchased: --
Shares converted: (200,000)
Shares as of 6/30/04: --
Net realized gain (loss): --
Dividend income earned: $ 50,111
Value at end of period: --
Security Name: Bank of America Corp.
(As a result of the acquisition of FleetBoston Financial Corp. effective
April 1, 2004, Bank of America Corp. became the parent company of the
Investment Advisor):
Shares as of 12/31/03: --
Shares purchased: 161,800*
Shares sold: --
Shares acquired through acquisition: 79,505
Shares as of 6/30/04: 241,305
Net realized gain (loss): --
Dividend income earned: $ 268,724**
Value at end of period: $ 20,419,229
*Occurred prior to April 1, 2004.
**Represents activity for the period April 1, 2004 through June 30, 2004.
(d) Cost of investments for both financial statement and federal income tax
purposes is the same.
Gross unrealized appreciation and depreciation of investments at
June 30, 2004 is as follows:
Gross unrealized appreciation $ 196,521,510
Gross unrealized depreciation (95,213,934)
-------------
Net unrealized appreciation $ 101,307,576
=============
See Notes to Financial Statements.
20
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2004 (UNAUDITED)
ASSETS:
Unaffiliated investments at market value
(identified cost $1,059,450,301) $ 1,158,632,835
Affiliated investments at market value
(identified cost $18,294,187) 20,419,229
Receivable for investments sold 6,070,720
Dividends and interest receivable 736,760
Foreign tax reclaim 8,267
Other assets 26,400
---------------
TOTAL ASSETS 1,185,894,211
---------------
LIABILITIES:
Due to custodian bank 3,172,683
Payable for investments purchased 5,513,685
Investment advisory, administrative and bookkeeping/pricing
fees payable 858,600
Accrued expenses 190,952
---------------
TOTAL LIABILITIES 9,735,920
---------------
NET ASSETS $ 1,176,158,291
===============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized; 128,306,800 shares outstanding) $ 1,064,178,144
Accumulated net realized gain on investments 10,672,351
Net unrealized appreciation on investments
and foreign currency translations 101,307,796
---------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($9.17 PER SHARE) $ 1,176,158,291
===============
See Notes to Financial Statements.
21
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
INVESTMENT INCOME:
Dividends $ 5,810,480
Dividends from affiliates 318,835
Interest 178,838
--------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $46,424) 6,308,153
EXPENSES:
Investment advisory fee $ 4,172,809
Administrative fee 1,044,373
Bookkeeping and pricing fees 115,543
Custodian fee 30,749
Transfer agent fees 79,277
Shareholder communication expenses 208,471
Trustees' fees and expenses 45,165
NYSE fee 58,286
Miscellaneous expense 74,112
-------------
TOTAL EXPENSES 5,828,785
--------------
CUSTODY EARNINGS CREDIT (311)
--------------
NET EXPENSES 5,828,474
--------------
NET INVESTMENT INCOME 479,679
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 491,094,795
Cost of investments sold 408,867,311
-------------
Net realized gain on investment transactions 82,227,484
Net unrealized appreciation on investments and foreign currency:
Beginning of period 121,537,662
End of period 101,307,796
-------------
Change in unrealized appreciation-net (20,229,866)
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 62,477,297
==============
See Notes to Financial Statements.
22
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
OPERATIONS:
Net investment income $ 479,679 $ 1,019,935
Net realized gain on investment transactions 82,227,484 61,134,908
Change in unrealized appreciation (depreciation)
on investments and foreign currency-net (20,229,866) 279,157,402
---------------- ---------------
Net increase in net assets resulting from operations 62,477,297 341,312,245
---------------- ---------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (479,679) (1,019,983)
Net realized gain on investments (57,692,852) (37,070,493)
Paid-in capital -- (57,734,539)
---------------- ---------------
Total distributions (58,172,531) (95,825,015)
---------------- ---------------
CAPITAL TRANSACTIONS:
Dividend reinvestments 18,933,626 38,881,100
---------------- ---------------
Total increase in net assets 23,238,392 284,368,330
NET ASSETS:
Beginning of period 1,152,919,899 868,551,569
---------------- ---------------
End of period $ 1,176,158,291 $ 1,152,919,899
================ ===============
See Notes to Financial Statements.
23
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 ----------------------------------
(UNAUDITED) 2003 2002 2001
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 9.13 $ 7.14 $ 10.65 $ 13.61
---------------- -------- --------- ---------
Income from Investment Operations:
Net investment income -- (b) 0.01 0.01 0.03
Net realized and unrealized gain (loss)
on investments and foreign currency 0.50 2.76 (2.56) (1.79)
Provision for federal income tax -- -- -- --
---------------- -------- --------- ---------
Total from Investment Operations 0.50 2.77 (2.55) (1.76)
---------------- -------- --------- ---------
Less Distributions from:
Net investment income -- (b) (0.01) (0.01) (0.03)
Realized capital gain (0.46) (0.30) (0.02) (1.17)
Paid-in capital -- (0.47) (0.85) --
---------------- -------- --------- ---------
Total Distributions (0.46) (0.78) (0.88) (1.20)
---------------- -------- --------- ---------
Change due to rights offering (c) -- -- (0.08) --
Impact of shares issued in dividend
reinvestment (d) -- -- -- --
---------------- -------- --------- ---------
Total Distributions, Reinvestments
and Rights Offering (0.46) (0.78) (0.96) (1.20)
---------------- -------- --------- ---------
Net asset value at end of period $ 9.17 $ 9.13 $ 7.14 $ 10.65
================ ======== ========= =========
Market price at end of period $ 9.21 $ 9.46 $ 6.64 $ 11.09
================ ======== ========= =========
TOTAL INVESTMENT RETURN FOR
SHAREHOLDERS: (e)
Based on net asset value 5.6%(f) 40.7% (25.0%) (12.7)%
Based on market price 2.3%(f) 56.7% (33.0%) 0.0%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,176 $ 1,153 $ 869 $ 1,133
Ratio of expenses to average net
assets (g) 1.01%(h) 1.04% 1.05% 1.03%
Ratio of net investment income to
average net assets (g) 0.08%(h) 0.11% 0.11% 0.27%
Portfolio turnover rate 40%(f) 64% 83% 64%
(a) Before provision for federal income tax.
(b) Rounds to less than $0.01 per share.
(c) Effect of All-Star's rights offerings for shares at a price below net
asset value.
(d) Effect of payment of a portion of distributions in newly issued shares at
a discount from net asset value.
(e) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
See Notes to Financial Statements.
24
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
-------- -------- -------- -------- -------- -------- ---------
Income from Investment Operations:
Net investment income 0.05 0.05 0.05 0.05 0.08 0.10 0.11
Net realized and unrealized gain (loss)
on investments and foreign currency 0.96 1.22 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 1.01 1.27 2.40 2.70 2.10 2.81 (0.09)
-------- -------- -------- -------- -------- -------- ---------
Less Distributions from:
Net investment income (0.06) (0.05) (0.05) (0.05) (0.08) (0.10) (0.12)
Realized capital gain (1.36) (1.34) (1.35) (1.28) (1.10) (0.94) (0.52)
Paid-in capital -- -- -- -- -- -- (0.36)
-------- -------- -------- -------- -------- -------- ---------
Total Distributions (1.42) (1.39) (1.40) (1.33) (1.18) (1.04) (1.00)
-------- -------- -------- -------- -------- -------- ---------
Change due to rights offering (c) -- -- (0.10) -- -- -- (0.05)
Impact of shares issued in dividend
reinvestment (d) -- (0.08) -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Total Distributions, Reinvestments
and Rights Offering (1.42) (1.47) (1.50) (1.33) (1.18) (1.04) (1.05)
-------- -------- -------- -------- -------- -------- ---------
Net asset value at end of period $ 13.61 $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26
======== ======== ======== ======== ======== ======== =========
Market price at end of period $ 12.375 $ 11.063 $ 12.938 $ 13.313 $ 11.250 $ 10.875 $ 8.500
======== ======== ======== ======== ======== ======== =========
TOTAL INVESTMENT RETURN FOR
SHAREHOLDERS: (e)
Based on net asset value 8.8% 10.2% 19.8% 26.6% 21.7% 31.8% (0.8)%
Based on market price 25.4% (4.4)% 9.1% 34.4% 16.2% 41.4% (14.9)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,376 $ 1,396 $ 1,351 $ 1,150 $ 988 $ 872 $ 710
Ratio of expenses to average net
assets (g) 0.96% 0.97% 1.00% 1.01% 1.03% 1.06% 1.07%
Ratio of net investment income to
average net assets (g) 0.37% 0.37% 0.39% 0.38% 0.73% 0.92% 1.16%
Portfolio turnover rate 83% 90% 76% 99% 70% 54% 44%
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(h) Annualized.
See Notes to Financial Statements.
25
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED)
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
26
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.
III. FEDERAL TAX INFORMATION
The tax character of distributions paid during the year ended December 31, 2003
was as follows:
Distributions paid from:
Ordinary income* $ 9,756,164
Long-term capital gain 28,334,312
------------
38,090,476
Return of capital 53,106,588
------------
$ 91,197,064
*For tax purposes short-term capital gains distributions, if any, are considered
ordinary income distributions.
The source of the distributions in the Statement of Changes in Net Assets
for the six-month period ended June 30, 2004 are estimates and are subject to
change based on Fund activity through December 31, 2004, the Fund's fiscal
year-end.
IV. FEES AND COMPENSATION PAID TO AFFILIATES
Liberty Asset Management Company ("LAMCO"), an indirect, wholly owned
subsidiary of Bank of America Corporation ("BOA"), is the investment advisor of
the Fund. Prior to April 1, 2004, LAMCO was an indirect, wholly owned subsidiary
of FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004,
FleetBoston, including the Fund's investment advisor, was acquired by BOA. The
acquisition did not change the way the Fund is managed, the investment personnel
assigned to manage the Fund or the fees paid by the Fund.
INVESTMENT ADVISORY FEE
LAMCO receives a monthly investment advisory 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 six months ended June 30, 2004, the Fund's annualized effective
investment advisory fee rate was 0.72%.
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%
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:
27
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 six months ended June 30, 2004, the Fund's annualized effective
administration fee rate was 0.18%.
PRICING AND BOOKKEEPING FEES
Columbia Management Advisors, Inc. ("Columbia"), an indirect, wholly owned
subsidiary of BOA and an affiliate of 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"), Columbia
has delegated those functions to State Street Corporation ("State Street").
Columbia 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, Columbia 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 six months ended June 30, 2004,
the annualized effective pricing and bookkeeping fee rate was 0.020%.
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
LAMCO or its affiliates.
OTHER
Columbia provides certain services to the Fund related to Sarbanes-Oxley
compliance. For the six months ended June 30, 2004, the Fund paid $2,937 to
Columbia for such services. This amount is included in "Miscellaneous expense"
on the Statement of Operations.
V. PORTFOLIO INFORMATION
PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 2004, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $460,068,509 and
$491,094,795, respectively.
VI. CAPITAL TRANSACTIONS
During the six months ended June 30, 2004, and the year ended December 31, 2003,
distributions in the amount of $18,933,626 and $38,881,100, 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
2,094,335 and 4,584,918 shares, respectively.
VII. SUBSEQUENT EVENT:
RIGHTS OFFERING
In a rights offering commencing June 2004, shareholders were 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 rights offering
expired on July 7, 2004. The Fund issued 15,841,927 shares at $8.34 per share,
which represented 95% of the net asset value on July 8, 2004. Total proceeds of
the offering amounted to $132,121,671. The issuance of shares at a discount to
NAV resulted in dilution to the NAV of $0.05 per share.
28
DISTRIBUTION POLICY/DIVIDEND REINVESTMENT PLAN
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 non-taxable 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.
DIVIDEND REINVESTMENT PLAN
Through the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan, the
Fund's shareholders have the opportunity to have their dividends automatically
reinvested in additional shares of the Fund. Participants are kept apprised of
the status of their account through quarterly statements.
For complete information and enrollment forms, please call Investor
Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern Time. If your shares are held for you by a broker, bank or
other nominee, you should contact the institution holding your shares if you
wish to participate in the Plan.
29
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
On April 30, 2004, the Annual Meeting of Shareholders of the Fund was held to
elect two (2) Trustees and to approve the Fund's Portfolio Management Agreement
with each of Pzena Investment Management, LLC and Matrix Asset Advisors, Inc. On
March 10, 2004, the record date for the Meeting, the Fund had outstanding
126,212,463 shares of beneficial interest. The votes cast at the Meeting were as
follows:
1. PROPOSAL TO ELECT (2) TRUSTEES:
FOR WITHHELD
--- --------
Richard W. Lowry 101,215,872 1,304,923
John J. Neuhauser 101,236,008 1,284,787
The Board of Trustees is divided into the following three classes, each
with a term expiring in the indicated year:
2005 2006 2007
---- ---- ----
John A. Benning William E. Mayer Richard W. Lowry
James E. Grinnell John J. Neuhauser
2. PROPOSAL TO APPROVE THE FUND'S PORTFOLIO MANAGEMENT AGREEMENT WITH PZENA
INVESTMENT MANAGEMENT, LLC:
For 100,390,004
Against 911,070
Abstain 1,219,721
3. PROPOSAL TO APPROVE THE FUND'S PORTFOLIO MANAGEMENT AGREEMENT WITH
MATRIX ASSET ADVISORS, INC.:
For 100,279,089
Against 945,991
Abstain 1,295,715
30
NOTES
31
NOTES
32
[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
Michael G. Clarke, Controller
Vicki L. Benjamin, Chief Accounting Officer
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.
COVER IMAGE OF THE NEW YORK STOCK EXCHANGE FACADE USED WITH PERMISSION OF NYSE.
USA LISTED NYSE
[ALL-STAR(R) EQUITY FUND LOGO]
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
USA LISTED NYSE
A MEMBER OF THE
[CLOSED-END FUND
ASSOCIATION, INC. LOGO]
WWW.CLOSED-ENDFUNDS.COM
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable at this time.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the six month period ended June 30, 2004, there were no purchases made by
or on behalf of the registrant or any "affiliated purchaser," as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934 ("Exchange Act"), of
shares or other units of any class of the registrant's equity securities that
are registered by the registrant pursuant to Section 12 of the Exchange Act.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have not been any material changes to the procedures by which shareholders
may recommend nominees to the registrant's Board of Trustees/Directors since
those procedures were last disclosed in response to Item 7(d)(2)(ii)(G) of
Schedule 14A.
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: Not
applicable at this time.
(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.
(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
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William R. Parmentier, Jr., President
Date September 2, 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
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William R. Parmentier, Jr., President
Date September 2, 2004
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By (Signature and Title) /s/ J. Kevin Connaughton
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J. Kevin Connaughton, Treasurer
Date September 2, 2004
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