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

(Address of principal executive offices)

 

(Zip code)

 

James R. Bordewick, Jr., Esq.
Columbia Management Advisors, LLC
One Financial Center
Boston, MA 02111

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

1-617-426-3750

 

 

Date of fiscal year end:

December 31, 2006

 

 

Date of reporting period:

June 30, 2006

 

 

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. § 3507.

 



 

Item 1. Reports to Stockholders

 



 

 



 

LIBERTY ALL-STAR® EQUITY FUND

 

 

 

2nd Quarter 2006

 

Year-to-Date

 

Fund Statistics

 

 

 

 

 

Period End Net Asset Value (NAV)

 

 

$8.37

 

Period End Market Price

 

 

$7.54

 

Period End Discount

 

 

9.9%

 

Distributions

 

$0.22

 

$0.45

 

Market Price Trading Range

 

$7.06 to $8.44

 

$7.06 to $8.77

 

Discount Range

 

6.4% to 11.5%

 

3.4% to 11.5%

 

 

 

 

 

 

 

Performance Summary

 

 

 

 

 

Shares Valued at NAV

 

(3.6)%

 

(0.5)%

 

Shares Valued at NAV with Dividends Reinvested

 

(3.3)%

 

0.0%

 

Shares Valued at Market Price with Dividends Reinvested

 

(6.8)%

 

(3.7)%

 

Lipper Large-Cap Core Mutual Fund Average

 

(2.5)%

 

1.3%

 

S&P 500 Index

 

(1.4)%

 

2.7%

 

 

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. A description of the Lipper benchmark and the S&P 500 Index can be found on page 35.

 

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

 

Shares of closed-end funds frequently trade at a discount to net asset value. The price of the fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.

 



 

President’s Letter

 

Fellow Shareholders:

 

July 2006

 

The S&P 500 Index was ahead 5.6 percent through April of this year before a broad reversal took the index down 2.7 percent during the May – June period. The retrenchment reflected a powerful shift in investor sentiment – from accepting higher risk in the pursuit of potentially higher returns to an attitude of caution and risk aversion. Investors had benefited from positions in a range of asset classes – from emerging markets to industrial commodities – that had delivered good to near-spectacular returns over the past couple of years. But the Federal Reserve’s protracted series of increases in short-term interest rates coupled with tighter monetary policies of central banks around the world finally took their toll – exacerbated by inflation fears, slowing economic growth, corporate earnings worries and geopolitical tensions. It was one of those reversals offering no safe haven, as everything from stocks and bonds to gold, emerging markets and commodities gave up ground.

 

For the second quarter, the S&P 500 Index declined 1.4 percent, leaving it ahead 2.7 percent year-to-date through June 30. In the first quarter, nine out of 10 S&P sectors posted gains. In the second quarter, only five did – and two of those were
in positive territory by a slender 0.01 percent. The best return (+5.7 percent) came from utilities – the only sector to post a negative return in the first quarter. Energy and consumer staples also showed good returns. The laggards were led by information technology
(-9.9 percent) and health care (-5.0 percent).

 

For the quarter, Liberty All-Star Equity Fund returned -3.6 percent with shares valued at net asset value (NAV), -3.3 percent with shares valued at NAV with dividends reinvested and -6.8 percent with shares valued at market price with dividends reinvested. These returns trailed the S&P 500 Index, as well as the Lipper Large-Cap Core Mutual Fund Average, which returned -2.5 percent.

 

From an investment return perspective, the primary difficulty for the Fund was underweights to the three best performing sectors in the S&P 500 Index – as mentioned, utilities, energy and consumer staples – and an overweight to the weak information technology sector.

 

While we are not pleased with the Fund’s second quarter investment return, Fund NAV performance has been decidedly positive and ahead of its Lipper primary benchmark over all longer-term periods, i.e., three, five, 10 and 15 years and since inception. From a market price perspective, the greater concern is the current short-term poor performance.

 

As shareholders are probably aware, the share price of closed-end funds typically trade at a premium or a discount to the underlying NAV. For the most part over the years, Fund NAV and share price have tracked reasonably well. Over the past five years, for example, Fund shares have averaged a 2.7 percent premium and over the past 10 years

 

1



 

 

they have averaged a 2.0 percent discount. At June 30 the discount was 9.9 percent.

 

We have experienced premiums or discounts outside the normal range in the past - usually for relatively brief periods of time before returning closer to the average. This particular period began in the fourth quarter of 2005, and has affected many closed-end funds. The question is why. Our belief is that it can be traced in part to sustained increases in short-term interest rates by the Federal Reserve. The Fed has raised the Fed funds rate at 17 straight meetings of the Open Market Committee. As Treasury yields rise, they eventually become a surrogate for the Fund’s distribution policy – and without the normal risk associated with stock market investing. Although we cannot guarantee when or if the Fund’s discount will narrow, be assured that the Fund’s long-term philosophy and strategy remain intact, and we continue to monitor the situation closely.

 

Turning to another matter, we are pleased to introduce Chase Investment Counsel Corporation as a new growth manager in the Fund, replacing Mastrapasqua Asset Management as of June 1. To learn about the Fund’s new manager, I invite you to read the interview with Chase Senior Vice President and Senior Portfolio Manager David Scott beginning on page 8. Information about the investment professionals at the firm can be found on page 36.

 

We are grateful for your long-term support of the Fund.

 

 

Sincerely,

 

/s/ William R. Parmentier, Jr.

 

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star Equity Fund

 

The views expressed in the President’s Letter and the Manager Interview reflect the views of the President and manager, respectively, as of July 2006 and may not reflect their views on the date this report is first published or anytime thereafter. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions and the respective parties disclaim any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent. References to specific company securities should not be construed as a recommendation or investment advice.

 

2



 

Investment Managers/Portfolio Characteristics

 

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

 

 

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, 2006

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

S&P

 

 

 

Schneider

 

Pzena

 

Matrix

 

Chase*

 

TCW

 

Fund

 

500 Index

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Holdings

 

60

 

33

 

32

 

39

 

29

 

166

**

500

 

Percent of Holdings in Top 10

 

42

%

40

%

39

%

38

%

58

%

18

%

19

%

Weighted Average Market Capitalization (billions)

 

$

23

 

$

62

 

$

89

 

$

53

 

$

48

 

$

55

 

$

86

 

Average Five-Year Earnings Per Share Growth

 

17

%

11

%

8

%

21

%

40

%

19

%

15

%

Dividend Yield

 

1.3

%

2.2

%

1.8

%

1.4

%

0.5

%

1.4

%

1.9

%

Price/Earnings Ratio

 

15

x

15

x

17

x

19

x

25

x

18

x

16

x

Price/Book Value Ratio

 

2.0

x

2.7

x

2.7

x

4.7

x

6.3

x

3.7

x

3.4

x

 


*

 

Chase Investment Counsel Corporation replaced Mastrapasqua Asset Management, Inc. effective June 1, 2006.

**

 

Certain holdings are held by more than one manager.

 

3



 

Investment Growth as of June 30, 2006

 

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, 2006. For certain information, it also assumes full participation in rights offerings (see below). This covers the period since the Fund commenced its 10 percent distribution policy in 1988.

 

 

                   The growth of the investment assuming all distributions were received in cash and not reinvested back into the Fund. The value of the investment under this scenario grew to $46,150 (includes the June 30, 2006 value of the original investment of $12,567, plus distributions during the period of $32,466 and tax credits on retained capital gains of $1,117).

 

                   The additional value realized through reinvestment of all distributions and tax credits. The value of the investment under this scenario grew to $90,815.

 

                  On six occasions, the Fund has conducted rights offerings that allow shareholders to purchase additional shares at a discount. The cost to fully participate in all the rights offerings under the terms of each offering totaled $35,416.

 

                  The additional value realized through full participation in all the rights offerings under the terms of each offering. The value of the investment under this scenario grew to $147,601 (includes the cost of the rights of $35,416).

 

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

 

 

 

 

 

 

 

 

 

1989

 

0.95

 

 

 

 

 

 

 

 

 

1990

 

0.90

 

 

 

 

 

 

 

 

 

1991

 

1.02

 

 

 

 

 

 

 

 

 

1992

 

1.07

 

April

 

10

 

$

10.05

 

 

 

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

 

0.89

 

July

 

10**

 

8.34

 

 

 

2005

 

0.87

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

1st Quarter

 

0.23

 

 

 

 

 

 

 

 

 

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.

 

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

 

5



 

Top 20 Holdings and Economic Sectors as of June 30, 2006

 

TOP 20 HOLDINGS*

 

PERCENT OF NET ASSETS

 

 

 

 

 

JPMorgan Chase & Co.

 

2.1

%

Countrywide Financial Corp.

 

2.0

 

Wal-Mart Stores, Inc.

 

1.9

 

Schlumberger Ltd.

 

1.9

 

Fannie Mae

 

1.8

 

The Progressive Corp.

 

1.6

 

Citigroup, Inc.

 

1.5

 

Morgan Stanley

 

1.5

 

MetLife, Inc.

 

1.4

 

Microsoft Corp.

 

1.4

 

Pfizer, Inc.

 

1.3

 

Tyco International Ltd.

 

1.3

 

Reliant Energy, Inc.

 

1.3

 

Network Appliance, Inc.

 

1.2

 

Google, Inc., Class A

 

1.2

 

Dell, Inc.

 

1.1

 

General Electric Co.

 

1.1

 

eBay, Inc.

 

1.1

 

Freddie Mac

 

0.9

 

American International Group, Inc.

 

0.9

 

 

 

 

 

 

 

28.5

%

 

ECONOMIC SECTORS*

 

PERCENT OF NET ASSETS

 

 

 

 

 

Financials

 

26.2

%

Consumer Discretionary

 

18.1

 

Information Technology

 

16.2

 

Industrials

 

13.2

 

Health Care

 

9.7

 

Energy

 

5.3

 

Consumer Staples

 

4.0

 

Utilities

 

2.8

 

Materials

 

1.8

 

Telecommunication Services

 

0.2

 

Other Net Assets

 

2.5

 

 

 

 

 

 

 

100.0

%

 


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

 

6



 

Major Stock Changes in the Second Quarter

 

The following are the major ($5.0 million or more) stock changes–both purchases and sales– that were made in the Fund’s portfolio during the second quarter of 2006.

 

 

 

 

 

SHARES AS OF

 

SECURITY NAME

 

PURCHASES (SALES)

 

JUNE 30, 2006

 

PURCHASES

 

 

 

 

 

D.R. Horton, Inc.

 

221,700

 

221,700

 

Dell, Inc.

 

335,500

 

595,800

 

Dollar General Corp.

 

510,000

 

510,000

 

Wal-Mart Stores, Inc.

 

127,225

 

515,725

 

 

 

 

 

 

 

SALES

 

 

 

 

 

Accenture Ltd., Class A

 

(175,000

)

0

 

Ace Ltd.

 

(105,000

)

0

 

Avnet, Inc.

 

(236,175

)

0

 

Eli Lilly and Co.

 

(100,000

)

0

 

Johnson Controls, Inc.

 

(98,525

)

0

 

Morgan Stanley

 

(78,850

)

305,075

 

St. Jude Medical, Inc.

 

(147,300

)

0

 

The Walt Disney Co.

 

(235,300

)

164,840

*

Yahoo!, Inc.

 

(271,900

)

236,900

 

 


*Adjusted for acquisition of Pixar, Inc.

 

7



 

Manager Interview

 

 

David B. Scott, CFA, CIC

Chase Investment Counsel Corporation

 

Companies with consistent growth and ‘prudently’ priced stocks make the shopping list at Chase

 

The newest of Liberty All-Star Equity Fund’s five investment managers is Chase Investment Counsel Corp., which was retained beginning June 1, 2006. Located in Charlottesville, Virginia, Chase is a growth manager that has a valuation orientation to its investment process, seeking to invest in quality growth stocks selling at reasonable prices. The firm’s investment process is characterized by a disciplined combination of fundamental, technical and quantitative research. We recently had the chance to speak with David Scott, Chase’s Senior Vice President and Senior Portfolio Manager.

 

Introduce us to Chase Investment Counsel, please, in terms of history, size, types of clients, ownership and any interesting facts or insights that distinguish the firm.

 

Chase Investment Counsel was founded in 1957 and is an independent organization, unaffiliated with any bank, brokerage or other type of financial firm. We’re actually the oldest independent investment adviser in the Commonwealth of Virginia. We’re independent in the sense that we’re entirely owned by our investment professionals and two additional officers of the company. We have a total of 17 employees, eight of whom are directly involved in the investment process. In terms of assets under management, we manage approximately $5.8 billion with about 200 clients. Some three-quarters of our clients are institutions, with the remainder being high net worth individuals and families.

 

What makes us a little different from other firms? One is our client population. Our clients are fairly limited in number, mostly concentrated in institutions and fairly good-sized in terms of the amount of money we manage for them. And that’s something that isn’t accidental – we’ve purposefully steered the firm in that direction. That leads to another distinguishing factor – high quality client service. Having fewer, larger clients has allowed us to concentrate our client service efforts. All our investment professionals are involved in client service, so there’s no wall between the clients and investment decision-makers. We also take a team approach to client relations, and that gives our clients an opportunity to have multiple contacts with people in the firm.

 

Among other distinguishing characteristics, we have an active board of directors that advises us on business decisions – not on investment decisions, but business decisions. That frees the investment professionals to spend more time on investments.

 

8



 

Can you describe the firm’s investment philosophy?

 

In terms of philosophy it’s pretty straightforward – we’re a growth stock manager seeking to purchase stocks at reasonable prices, which is traditionally known as “GARP,” or “growth at a reasonable price.”

 

You actually use the term “prudent price” instead of “reasonable price,” don’t you?

 

Yes, and I think the word prudent is important because while we believe long-term consistency of growth is a strong predictor of equity performance one has to be conscious of not paying unreasonable or imprudent prices. Growth at any price is what I would call a flawed investment strategy.

 

By the same token, it’s important to point out that we don’t focus exclusively on cheap stocks. We look for prudent pricing. We think the market, for the most part, gets its pricing just about right – but, still, we want to be sure that we’re paying a reasonable price. Most often, this comes up as a risk control mechanism, particularly at major pops in the market when some stocks, even though they have very good characteristics, trade at outrageous prices. Those are the stocks that we want to avoid.

 

“While we believe long-term consistency of growth is a strong predictor of equity performance one has to be conscious of not paying unreasonable or imprudent prices.”

 

What is your chief metric for determining valuation?

 

Primarily the PEG ratio, or price to earnings growth (a stock’s P/E ratio divided by the annual growth rate of the company’s earnings). We try to keep our PEG ratios at or below the market. Just to give you an idea, as of June 30, our stocks had a PEG ratio of .85 versus the S&P 500 Index average of 1.69. As a general rule, a stock is often considered underpriced if its PEG ratio is much below 1 and overpriced if it is much greater than 1. We also look at the PEG ratio to the reinvestment rate, which is a balance sheet measure of a company’s sustainable growth, that is, the growth that it can sustain without taking on additional debt or issuing new equity. We were at 1.02 as of June 30 while the S&P 500 Index was at 1.54.

 

Can you walk us through highlights of your investment process and sell discipline?

 

Once again, it’s a team approach and all the team members are involved in the investment decision-making and play critical roles in that process. That said, it’s done in a very disciplined manner. We believe that you have to have a disciplined, repeatable approach to selecting stocks as opposed to one that is subjective. So, our discipline is to manage information in a way that we can use it effectively and then utilize senior, experienced investment professionals to focus on a select group of stocks to put in the portfolio.

 

We start by using computer screens to take a very large universe of stocks –

 

9



 

over 6,000 – and initially screen for companies with earnings per share growth of 10 percent or greater over the last five years, with seven of the last 10 years or at least four of the past five rising. While that reduces the universe to about 600 names, it’s still too large a list. So, we run more screens delving into companies’ fundamental and technical factors. The focus of the fundamental analysis is short- and intermediate-term earnings growth. We also look at return on equity, debt to equity, the reinvestment rate and the P/E ratio. On the technical side the focus is primarily on relative price strength versus the universe, but the technical screens also look at unusual volume moves, momentum, insider transactions and price volatility. These screens are designed to take out the stocks that are not performing well currently. We don’t buy fallen angels and we don’t buy stocks that are out of favor because of fundamental or technical problems. We believe that the best growth stocks come from a universe of good performers in both the fundamental and technical areas.

 

“[Our investment process] is a team approach and all the team members are involved in the investment decision-making and play critical roles in that process.”

 

Finally, we get down to about 40 to 60 stocks every week. These stocks have the characteristics that I described, and they become the buy candidates. At this point, we do further research in order to pick the best of the best. We already own many of these stocks, so we are usually putting five to 10 stocks under the microscope and we may end up with one or two that are excellent portfolio candidates. At this point, we’re into the more subjective part of our process in which those five to 10 names are turned over to our analysts. They will conduct extensive research, utilize Wall Street contacts and independent research sources, and try to dig up any negative insights or analysis. They’ll do everything they can to flesh out the story and find something unique that makes the stock attractive.

 

The final part of the process is valuation, for which we use the PEG ratio. A stock might be very attractive in all the other analyses, but if it’s not reasonably priced we won’t buy it. When we do buy a stock, we establish a weighting we think it should have in the portfolio and we also set a sell target. Then, we begin the process of putting it in the portfolio and we’ll monitor it for new information that we get on an ongoing basis.

 

A stock can be sold for any of four reasons. One, it reaches the price target we set when we bought it and it can’t be upgraded. Two, we’ll sell if the fundamentals deteriorate; three, if the technicals deteriorate; and four, if we need to make room for other stocks that are simply more attractive and compelling.

 

What guidelines do you follow at the portfolio level?

 

Our portfolios generally contain 35 to 45 stocks. We think 15 to 20 is too risky, and that 75 to 100 dilutes our best ideas. We further diversify the portfolio by making sure that no more than 12 percent is in

 

10



 

any single industry. We buy the stocks of the largest capitalization companies as well as those that are in the mid-cap range, but on average the larger companies are more heavily weighted. We don’t constrain our sectors, either. Probably the best examples of that would be energy, which is about 4 to 5 percent of the Russell 1000 Growth Index but recently 12 to 15 percent for us, and technology, which is a little more than 20 percent in the index but about 10 percent for us.

 

What are two stocks in the portion of the Liberty All-Star Equity Fund portfolio that you manage that serve as good examples of the Chase approach?

 

One is Pepsico, currently about 4 percent of our portion of the Liberty All-Star Equity Fund portfolio. Pepsi is a consistent long-term grower, it fits the quantitative profile and the short- and intermediate-term outlook for the company is strong. It has the added advantage of maintaining stability in what has become a very uneven earnings climate. Pepsi has relatively low earnings volatility, low stock price volatility and we think it’s trading at a reasonable price. It’s an international company that actually has a higher growth rate abroad than its competitor, Coca-Cola, and it’s more diversified than Coca-Cola as a large portion of its earnings come from the snack food business. The company has also diversified away from carbonated soft drinks into water and sports drinks. So, it’s a company with $100 billion market cap selling at around $60 a share that we think has the potential to reach $70 a share in the next 12 to 18 months.

 

“Our portfolios generally contain 35 to 45 stocks. We think 15 to 20 is too risky, and that 75 to 100 dilutes our best ideas.”

 

The other stock is in a different area and that’s General Dynamics. Once again, it’s a strong company, a dominant player in the defense industry and also in small business jets. Its businesses continue to be very strong – in fact, they’ve just informed analysts that the business jet division is doing better than expected. So, we have a company that has consistent longer-term growth, once again in excess of our requirements. It passed all the quantitative screens, and we like its very strong balance sheet. Trading at between 15 to 16 times earnings, General Dynamics is reasonably priced, and it’s in an industry that we think will hold up against almost all economic conditions. General Dynamics is a large cap company, but at a $27 billion market cap it’s not as large as Pepsi. The point there is that we buy stocks across the capitalization range, rather than being constrained to just the largest growth stocks.

 

Many thanks for a great interview, and welcome to the Liberty All-Star Equity Fund team.

 

11



 

Schedule of Investments as of June 30, 2006 (Unaudited)

 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (97.0%)

 

 

 

 

 

 

 

 

 

 

 

CONSUMER DISCRETIONARY (17.8%)

 

 

 

 

 

 

 

 

 

 

 

Auto Components (1.0%)

 

 

 

 

 

Magna International, Inc., Class A

 

127,650

 

$

9,186,971

 

Visteon Corp. (a)

 

526,625

 

3,796,966

 

 

 

 

 

12,983,937

 

Automobiles (0.4%)

 

 

 

 

 

Honda Motor Co., Ltd. (b)

 

149,000

 

4,741,180

 

 

 

 

 

 

 

Hotels, Restaurants & Leisure (2.4%)

 

 

 

 

 

Carnival Corp.

 

132,000

 

5,509,680

 

GTECH Holdings Corp.

 

35,075

 

1,219,909

 

Harrah’s Entertainment, Inc.

 

27,500

 

1,957,450

 

Hilton Hotels Corp.

 

331,125

 

9,364,215

 

Marriott International, Inc., Class A

 

175,600

 

6,693,872

 

Starbucks Corp. (a)

 

179,220

 

6,767,347

 

 

 

 

 

31,512,473

 

Household Durables (1.5%)

 

 

 

 

 

D.R. Horton, Inc.

 

221,700

 

5,280,894

 

Newell Rubbermaid, Inc.

 

103,125

 

2,663,719

 

Whirlpool Corp.

 

131,025

 

10,829,216

 

 

 

 

 

18,773,829

 

Internet & Catalog Retail (2.3%)

 

 

 

 

 

Amazon.com, Inc. (a)

 

312,900

 

12,102,972

 

eBay, Inc. (a)

 

465,400

 

13,631,566

 

Liberty Media Holding Corp., Interactive Series A (a)

 

199,871

 

3,449,773

 

 

 

 

 

29,184,311

 

Media (3.5%)

 

 

 

 

 

Comcast Corp., Class A (a)

 

307,000

 

10,063,460

 

Getty Images, Inc. (a)

 

59,300

 

3,766,143

 

Liberty Global, Inc., Class A (a)

 

129,582

 

2,786,013

 

Liberty Global, Inc., Series C (a)

 

139,105

 

2,861,390

 

Liberty Media Holding Corp., Capital Series A (a)

 

39,979

 

3,349,041

 

Omnicom Group, Inc.

 

27,700

 

2,467,793

 

Time Warner, Inc.

 

590,000

 

10,207,000

 

The Walt Disney Co.

 

164,840

 

4,945,200

 

XM Satellite Radio Holdings, Inc., Class A (a)

 

216,500

 

3,171,725

 

Yell Group PLC

 

230,000

 

2,172,593

 

 

 

 

 

45,790,358

 

 

See Notes to Schedule of Investments and Financial Statements.

 

12



 

Schedule of Investments

 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Multi-line Retail (3.9%)

 

 

 

 

 

Dollar General Corp.

 

510,000

 

$

7,129,800

 

J.C. Penney Co., Inc.

 

120,300

 

8,121,453

 

Kohl’s Corp. (a)

 

180,825

 

10,690,374

 

Wal-Mart Stores, Inc.

 

515,725

 

24,842,473

 

 

 

 

 

50,784,100

 

Specialty Retail (2.8%)

 

 

 

 

 

AutoZone, Inc. (a)

 

49,600

 

4,374,720

 

GameStop Corp., Class A (a)

 

70,825

 

2,974,650

 

The Gap, Inc.

 

490,000

 

8,526,000

 

Ross Stores, Inc.

 

292,000

 

8,190,600

 

Staples, Inc.

 

190,900

 

4,642,688

 

TJX Companies, Inc.

 

357,075

 

8,162,734

 

 

 

 

 

36,871,392

 

CONSUMER STAPLES (4.0%)

 

 

 

 

 

 

 

 

 

 

 

Beverages (0.8%)

 

 

 

 

 

PepsiCo, Inc.

 

172,600

 

10,362,904

 

 

 

 

 

 

 

Food & Staples Retailing (0.7%)

 

 

 

 

 

Costco Wholesale Corp.

 

69,300

 

3,959,109

 

Walgreen Co.

 

127,900

 

5,735,036

 

 

 

 

 

9,694,145

 

Food Products (2.1%)

 

 

 

 

 

Archer-Daniels-Midland Co.

 

154,200

 

6,365,376

 

Dean Foods Co. (a)

 

38,800

 

1,442,972

 

Kellogg Co.

 

107,500

 

5,206,225

 

Sara Lee Corp.

 

491,650

 

7,876,233

 

Tate & Lyle PLC (b)

 

120,500

 

5,397,954

 

Tyson Foods, Inc., Class A

 

30,500

 

453,230

 

 

 

 

 

26,741,990

 

Household Products (0.4%)

 

 

 

 

 

Colgate-Palmolive Co.

 

85,200

 

5,103,480

 

 

 

 

 

 

 

ENERGY (5.3%)

 

 

 

 

 

 

 

 

 

 

 

Energy Equipment & Services (3.8%)

 

 

 

 

 

Baker Hughes, Inc.

 

87,700

 

7,178,245

 

Halliburton Co.

 

144,000

 

10,686,240

 

Schlumberger Ltd.

 

377,670

 

24,590,094

 

Tidewater, Inc.

 

137,000

 

6,740,400

 

 

 

 

 

49,194,979

 

 

See Notes to Schedule of Investments and Financial Statements.

 

13



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Oil, Gas & Consumable Fuels (1.5%)

 

 

 

 

 

BP PLC (b)

 

88,200

 

$

6,139,602

 

ChevronTexaco Corp.

 

100,000

 

6,206,000

 

Suncor Energy, Inc.

 

85,500

 

6,926,355

 

 

 

 

 

19,271,957

 

FINANCIALS (26.2%)

 

 

 

 

 

 

 

 

 

 

 

Capital Markets (2.3%)

 

 

 

 

 

Merrill Lynch & Co., Inc.

 

97,300

 

6,768,188

 

Morgan Stanley

 

305,075

 

19,283,791

 

UBS AG, Registered Shares

 

38,200

 

4,190,540

 

 

 

 

 

30,242,519

 

Commercial Banks (4.1%)

 

 

 

 

 

Bank of America Corp. (c)

 

170,000

 

8,177,000

 

Bank of New York Co., Inc.

 

261,000

 

8,404,200

 

Comerica, Inc.

 

117,925

 

6,130,921

 

Commerce Bancorp, Inc.

 

246,130

 

8,779,457

 

Hudson City Bancorp, Inc.

 

104,275

 

1,389,986

 

North Fork Bancorporation, Inc.

 

327,450

 

9,879,166

 

Sovereign Bancorp, Inc.

 

28,950

 

587,974

 

Wells Fargo & Co.

 

138,000

 

9,257,040

 

 

 

 

 

52,605,744

 

Consumer Finance (0.9%)

 

 

 

 

 

SLM Corp.

 

208,115

 

11,013,446

 

 

 

 

 

 

 

Diversified Financial Services (3.7%)

 

 

 

 

 

Citigroup, Inc.

 

409,350

 

19,747,044

 

JPMorgan Chase & Co.

 

656,775

 

27,584,550

 

 

 

 

 

47,331,594

 

Insurance (8.9%)

 

 

 

 

 

AFLAC, Inc.

 

62,300

 

2,887,605

 

Allstate Corp.

 

194,700

 

10,655,931

 

American International Group, Inc.

 

205,850

 

12,155,443

 

Aon Corp.

 

140,650

 

4,897,433

 

Genworth Financial, Inc., Class A

 

213,350

 

7,433,114

 

Marsh & McLennan Companies, Inc.

 

276,000

 

7,421,640

 

MetLife, Inc.

 

353,150

 

18,084,811

 

 

See Notes to Schedule of Investments and Financial Statements.

 

14



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Insurance (continued)

 

 

 

 

 

The Progressive Corp.

 

820,420

 

$

21,092,998

 

Prudential Financial, Inc.

 

67,700

 

5,260,290

 

RenaissanceRe Holdings Ltd.

 

60,125

 

2,913,658

 

Torchmark Corp.

 

177,175

 

10,758,066

 

UnumProvident Corp.

 

68,325

 

1,238,732

 

XL Capital Ltd., Class A

 

173,600

 

10,641,680

 

 

 

 

 

115,441,401

 

Real Estate Investment Trusts (1.0%)

 

 

 

 

 

Annaly Mortgage Management, Inc.

 

511,150

 

6,547,832

 

Host Marriott Corp.

 

112,275

 

2,455,454

 

Trizec Properties, Inc.

 

157,450

 

4,509,368

 

 

 

 

 

13,512,654

 

Real Estate Management & Development (0.0%)

 

 

 

 

 

The St. Joe Co.

 

7,500

 

349,050

 

 

 

 

 

 

 

Thrifts & Mortgage Finance (5.3%)

 

 

 

 

 

Countrywide Financial Corp.

 

666,075

 

25,364,136

 

Fannie Mae

 

477,166

 

22,951,685

 

Freddie Mac

 

214,950

 

12,254,299

 

Golden West Financial Corp.

 

6,100

 

452,620

 

Washington Mutual, Inc.

 

160,187

 

7,301,323

 

 

 

 

 

68,324,063

 

HEALTH CARE (9.7%)

 

 

 

 

 

 

 

 

 

 

 

Biotechnology (2.6%)

 

 

 

 

 

Amgen, Inc. (a)

 

74,300

 

4,846,589

 

Genentech, Inc. (a)

 

148,500

 

12,147,300

 

Genzyme Corp. (a)

 

118,200

 

7,216,110

 

MedImmune, Inc. (a)

 

352,000

 

9,539,200

 

 

 

 

 

33,749,199

 

Health Care Equipment & Supplies (1.1%)

 

 

 

 

 

Boston Scientific Corp. (a)

 

393,950

 

6,634,118

 

Varian Medical Systems, Inc. (a)

 

152,400

 

7,216,140

 

 

 

 

 

13,850,258

 

 

See Notes to Schedule of Investments and Financial Statements.

 

15



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Health Care Providers & Services (2.2%)

 

 

 

 

 

AmerisourceBergen Corp.

 

239,100

 

$

10,023,072

 

HCA, Inc.

 

159,825

 

6,896,449

 

Omnicare, Inc.

 

77,050

 

3,653,711

 

Quest Diagnostics, Inc.

 

65,300

 

3,912,776

 

Triad Hospitals, Inc. (a)

 

111,225

 

4,402,285

 

 

 

 

 

28,888,293

 

Pharmaceuticals (3.8%)

 

 

 

 

 

Bristol-Myers Squibb Co.

 

362,600

 

9,376,836

 

Johnson & Johnson

 

130,225

 

7,803,082

 

Novartis AG (b)

 

98,900

 

5,332,688

 

Pfizer, Inc.

 

743,300

 

17,445,251

 

Wyeth

 

203,000

 

9,015,230

 

 

 

 

 

48,973,087

 

INDUSTRIALS (13.0%)

 

 

 

 

 

 

 

 

 

 

 

Aerospace & Defense (3.6%)

 

 

 

 

 

The Boeing Co.

 

112,150

 

9,186,206

 

Bombardier, Inc., Class B (a)

 

1,059,275

 

2,951,129

 

General Dynamics Corp.

 

105,600

 

6,912,576

 

Goodrich Corp.

 

69,975

 

2,819,293

 

Lockheed Martin Corp.

 

101,000

 

7,245,740

 

Rockwell Collins, Inc.

 

127,000

 

7,095,490

 

United Technologies Corp.

 

162,100

 

10,280,382

 

 

 

 

 

46,490,816

 

Air Freight & Logistics (1.2%)

 

 

 

 

 

Expeditors International of Washington, Inc.

 

141,190

 

7,908,052

 

FedEx Corp.

 

69,800

 

8,156,828

 

 

 

 

 

16,064,880

 

Airlines (0.1%)

 

 

 

 

 

Southwest Airlines Co.

 

99,075

 

1,621,858

 

 

 

 

 

 

 

Electrical Equipment (1.2%)

 

 

 

 

 

American Power Conversion Corp.

 

461,000

 

8,984,890

 

Rockwell Automation, Inc.

 

90,000

 

6,480,900

 

 

 

 

 

15,465,790

 

 

See Notes to Schedule of Investments and Financial Statements.

 

16



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Industrial Conglomerates (3.0%)

 

 

 

 

 

3M Co.

 

93,200

 

$

7,527,764

 

General Electric Co.

 

421,600

 

13,895,936

 

Tyco International Ltd.

 

631,000

 

17,352,500

 

 

 

 

 

38,776,200

 

Machinery (1.8%)

 

 

 

 

 

Caterpillar, Inc.

 

148,200

 

11,037,936

 

Danaher Corp.

 

79,700

 

5,126,304

 

Navistar International Corp. (a)

 

267,525

 

6,583,790

 

 

 

 

 

22,748,030

 

Road & Rail (2.1%)

 

 

 

 

 

CSX Corp.

 

164,725

 

11,603,229

 

Norfolk Southern Corp.

 

163,700

 

8,712,114

 

Swift Transportation Co., Inc. (a)

 

43,350

 

1,376,796

 

Union Pacific Corp.

 

63,000

 

5,856,480

 

 

 

 

 

27,548,619

 

INFORMATION TECHNOLOGY (16.2%)

 

 

 

 

 

 

 

 

 

 

 

Communications Equipment (2.5%)

 

 

 

 

 

Cisco Systems, Inc. (a)

 

578,700

 

11,302,011

 

Lucent Technologies, Inc. (a)

 

3,921,100

 

9,489,062

 

QUALCOMM, Inc.

 

277,400

 

11,115,418

 

 

 

 

 

31,906,491

 

Computers & Peripherals (3.2%)

 

 

 

 

 

Dell, Inc. (a)

 

595,800

 

14,543,478

 

Hewlett-Packard Co.

 

358,925

 

11,370,744

 

Network Appliance, Inc. (a)

 

429,715

 

15,168,939

 

 

 

 

 

41,083,161

 

Electronic Equipment & Instruments (2.0%)

 

 

 

 

 

AU Optronics Corp. (b)

 

436,255

 

6,212,271

 

Celestica, Inc. (a)

 

319,725

 

3,050,177

 

Symbol Technologies, Inc.

 

724,000

 

7,811,960

 

Vishay Intertechnology, Inc. (a)

 

600,000

 

9,438,000

 

 

 

 

 

26,512,408

 

 

See Notes to Schedule of Investments and Financial Statements.

 

17



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Internet Software & Services (1.8%)

 

 

 

 

 

Google, Inc., Class A (a)

 

35,900

 

$

15,053,947

 

Yahoo!, Inc. (a)

 

236,900

 

7,817,700

 

 

 

 

 

22,871,647

 

IT Services (0.9%)

 

 

 

 

 

BearingPoint, Inc. (a)

 

553,380

 

4,631,791

 

Computer Sciences Corp. (a)

 

50,950

 

2,468,018

 

Convergys Corp. (a)

 

33,475

 

652,762

 

First Data Corp.

 

100,000

 

4,504,000

 

 

 

 

 

12,256,571

 

Semiconductors & Semiconductor Equipment (1.7%)

 

 

 

 

 

Intel Corp.

 

372,000

 

7,049,400

 

International Rectifier Corp. (a)

 

109,178

 

4,266,676

 

Maxim Integrated Products, Inc.

 

73,450

 

2,358,480

 

Novellus Systems, Inc. (a)

 

319,300

 

7,886,710

 

 

 

 

 

21,561,266

 

Software (4.1%)

 

 

 

 

 

Activision, Inc. (a)

 

95,400

 

1,085,652

 

Adobe Systems, Inc. (a)

 

164,980

 

5,008,793

 

CA, Inc.

 

437,358

 

8,987,707

 

Electronic Arts, Inc. (a)

 

81,300

 

3,499,152

 

Microsoft Corp.

 

766,925

 

17,869,352

 

Oracle Corp. (a)

 

792,400

 

11,481,876

 

Salesforce.com, Inc. (a)

 

185,500

 

4,945,430

 

 

 

 

 

52,877,962

 

MATERIALS (1.8%)

 

 

 

 

 

 

 

 

 

 

 

Chemicals (0.4%)

 

 

 

 

 

Cytec Industries, Inc.

 

28,975

 

1,554,799

 

The Mosaic Co. (a)

 

234,850

 

3,675,402

 

 

 

 

 

5,230,201

 

Metals & Mining (0.9%)

 

 

 

 

 

BHP Billiton Ltd. (b)

 

90,800

 

3,910,756

 

Newmont Mining Corp.

 

75,500

 

3,996,215

 

Southern Copper Corp.

 

51,400

 

4,581,282

 

 

 

 

 

12,488,253

 

 

See Notes to Schedule of Investments and Financial Statements.

 

18



 

 

 

SHARES

 

MARKET VALUE

 

COMMON STOCKS (CONTINUED)

 

 

 

 

 

 

 

 

 

 

 

Paper & Forest Products (0.5%)

 

 

 

 

 

International Paper Co.

 

187,532

 

$

6,057,284

 

 

 

 

 

 

 

TELECOMMUNICATION SERVICES (0.2%)

 

 

 

 

 

 

 

 

 

 

 

Wireless Telecommunication Services (0.2%)

 

 

 

 

 

Telephone & Data Systems, Inc., Special Common Shares

 

58,675

 

2,282,458

 

 

 

 

 

 

 

UTILITIES (2.8%)

 

 

 

 

 

 

 

 

 

 

 

Electric Utilities (0.4%)

 

 

 

 

 

Exelon Corp.

 

99,900

 

5,677,317

 

 

 

 

 

 

 

Independent Power Producers & Energy Traders (1.3%)

 

 

 

 

 

Reliant Energy, Inc. (a)

 

1,358,850

 

16,279,023

 

 

 

 

 

 

 

Multi-Utilities (1.1%)

 

 

 

 

 

Sempra Energy

 

229,200

 

10,424,016

 

Wisconsin Energy Corp.

 

110,200

 

4,441,060

 

 

 

 

 

14,865,076

 

TOTAL COMMON STOCKS (COST OF $1,169,831,706)

 

 

 

1,255,957,654

 

 

 

 

 

 

 

PREFERRED STOCK (0.3%)

 

 

 

 

 

 

 

 

 

 

 

CONSUMER DISCRETIONARY (0.3%)

 

 

 

 

 

 

 

 

 

 

 

Automobiles (0.3%)

 

 

 

 

 

General Motors Corp., Series C (cost of $2,789,438)

 

160,950

 

3,268,895

 

 

 

 

INTEREST
RATE

 

MATURITY
DATE

 

PAR
VALUE

 

 

 

CONVERTIBLE BONDS (0.2%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDUSTRIALS (0.2%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Airlines (0.2%)

 

 

 

 

 

 

 

 

 

AMR Corp. (cost of $1,865,073)

 

4.25

%

09/23/23

 

$

1,679,000

 

2,688,499

 

 

See Notes to Schedule of Investments and Financial Statements.

 

19



 

 

 

PAR VALUE

 

MARKET VALUE

 

SHORT-TERM INVESTMENT (2.1%)

 

 

 

 

 

 

 

 

 

 

 

REPURCHASE AGREEMENT (2.1%)

 

 

 

 

 

Repurchase agreement with State Street Bank & Trust Co., dated 06/30/06, due 07/03/06 at 4.40%, collateralized by several U.S. Treasury Bonds with various maturity dates, market value of $28,218,989 (repurchase proceeds $27,659,138) (Cost of $27,649,000)

 

$

27,649,000

 

$

27,649,000

 

 

 

 

 

 

 

TOTAL INVESTMENTS (99.6%) (COST OF $1,202,135,217)(d)

 

 

 

1,289,564,048

 

 

 

 

 

 

 

OTHER ASSETS & LIABILITIES, NET (0.4%)

 

 

 

4,738,117

 

 

 

 

 

 

 

NET ASSETS (100.0%)

 

 

 

$

1,294,302,165

 

 

 

 

 

 

 

NET ASSET VALUE PER SHARE (154,598,224 SHARES OUTSTANDING)

 

 

 

$

8.37

 

 


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, 2006:

 

Security name:

 

Bank of America Corp.

 

 

 

 

 

Shares as of 12/31/05:

 

170,000

 

 

 

 

 

Shares purchased:

 

 

 

 

 

 

Shares sold:

 

 

 

 

 

 

Shares as of 06/30/06:

 

170,000

 

 

 

 

 

Net realized gain/loss:

 

 

 

 

 

 

Dividend income earned:

 

$170,000

 

 

 

 

 

Value at end of period:

 

$8,177,000

 

 

(d) Cost of investments for federal income tax purposes is $1,202,135,217.

 

Gross unrealized appreciation and depreciation of investments at June 30, 2006 is as follows:

 

Gross unrealized appreciation

 

$

167,061,610

 

Gross unrealized depreciation

 

(79,632,779

)

Net unrealized appreciation

 

$

87,428,831

 

 

See Notes to Financial Statements.

 

20



 

Financial Statements

 

STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 (UNAUDITED)

 

ASSETS:

 

 

 

Unaffiliated investments at market value
(identified cost $1,195,223,718)

 

$

1,281,387,048

 

Affiliated investments at market value
(identified cost $6,911,499)

 

8,177,000

 

Cash

 

2,376

 

Receivable for investments sold

 

8,581,241

 

Dividends and interest receivable

 

1,177,646

 

Foreign tax reclaim

 

1,985

 

Other assets

 

100,719

 

TOTAL ASSETS

 

1,299,428,015

 

 

 

 

 

LIABILITIES:

 

 

 

Payable for investments purchased

 

4,082,327

 

Investment advisory, administrative and bookkeeping/pricing fees payable

 

908,560

 

Accrued expenses

 

134,963

 

TOTAL LIABILITIES

 

5,125,850

 

NET ASSETS

 

$

1,294,302,165

 

 

 

 

 

NET ASSETS REPRESENTED BY:

 

 

 

Paid-in capital (unlimited number of shares of beneficial interest without par value authorized; 154,598,224 shares outstanding)

 

$

1,215,221,997

 

Overdistributed net investment income

 

(858,186

)

Accumulated net realized loss on investments

 

(7,490,477

)

Net unrealized appreciation on investments

 

87,428,831

 

 

 

 

 

TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST ($8.37 PER SHARE)

 

$

1,294,302,165

 

 

See Notes to Financial Statements.  

 

21



 

STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)

 

INVESTMENT INCOME:

 

 

 

 

 

Dividends

 

 

 

$

8,128,794

 

Dividends from affiliates

 

 

 

170,000

 

Interest

 

 

 

582,124

 

TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES WITHHELD AT SOURCE WHICH AMOUNTED TO $22,784)

 

 

 

8,880,918

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Investment advisory fee

 

$

4,783,387

 

 

 

Administrative fee

 

1,194,445

 

 

 

Bookkeeping and pricing fees

 

84,624

 

 

 

Custodian fee

 

37,818

 

 

 

Transfer agent fees

 

77,722

 

 

 

Shareholder communication expenses

 

205,629

 

 

 

Trustees’ fees and expenses

 

82,218

 

 

 

NYSE fee

 

94,578

 

 

 

Miscellaneous expenses

 

131,789

 

 

 

 

 

 

 

 

 

TOTAL EXPENSES

 

 

 

6,692,210

 

 

 

 

 

 

 

CUSTODY EARNINGS CREDIT

 

 

 

(1,551

)

 

 

 

 

 

 

NET EXPENSES

 

 

 

6,690,659

 

 

 

 

 

 

 

NET INVESTMENT INCOME

 

 

 

2,190,259

 

 

 

 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

Net realized gain on investment transactions

 

 

 

69,793,074

 

 

 

 

 

 

 

Net unrealized appreciation on investments:

 

 

 

 

 

Beginning of period

 

163,702,429

 

 

 

End of period

 

87,428,831

 

 

 

Change in unrealized appreciation-net

 

 

 

(76,273,598

)

 

 

 

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

 

 

 

$

(4,290,265

)

 

See Notes to Financial Statements.

 

22



 

STATEMENT OF CHANGES IN NET ASSETS

 

 

 

 

 

YEAR ENDED

 

 

 

SIX MONTHS ENDED

 

DECEMBER 31,

 

 

 

JUNE 30, 2006

 

2005

 

 

 

(UNAUDITED)

 

 

 

OPERATIONS:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

2,190,259

 

$

2,558,482

 

 

 

 

 

 

 

Net realized gain on investment transactions

 

69,793,074

 

83,342,615

 

 

 

 

 

 

 

Change in unrealized appreciation on investments and foreign currency-net

 

(76,273,598

)

(20,825,770

)

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

(4,290,265

)

65,075,327

 

 

 

 

 

 

 

DISTRIBUTIONS DECLARED FROM:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

(3,091,965

)

(2,557,705

)

 

 

 

 

 

 

Net realized gain on investments

 

(66,477,237

)

(84,322,544

)

 

 

 

 

 

 

Paid-in capital

 

 

(43,732,531

)

 

 

 

 

 

 

Total distributions

 

(69,569,202

)

(130,612,780

)

 

 

 

 

 

 

CAPITAL TRANSACTIONS:

 

 

 

 

 

 

 

 

 

 

 

Dividend reinvestments

 

 

61,508,410

 

 

 

 

 

 

 

Total decrease in net assets

 

(73,859,467

)

(4,029,043

)

 

 

 

 

 

 

NET ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

1,368,161,632

 

1,372,190,675

 

 

 

 

 

 

 

End of period (including undistributed (overdistributed) net investment income of $(858,186) and $43,520, respectively)

 

$

1,294,302,165

 

$

1,368,161,632

 

 

See Notes to Financial Statements.

 

23



 

 

 

SIX MONTHS ENDED

 

YEAR ENDED DECEMBER 31,

 

 

 

JUNE 30, 2006

 

2005

 

2004

 

2003

 

 

 

(UNAUDITED)

 

 

 

 

 

 

 

PER SHARE OPERATING PERFORMANCE:

 

 

 

 

 

 

 

 

 

Net asset value at beginning of period

 

$

8.85

 

$

9.30

 

$

9.13

 

$

7.14

 

Income from Investment Operations:

 

 

 

 

 

 

 

 

 

Net investment income

 

0.01

 

0.02

 

0.02

 

0.01

 

Net realized and unrealized gain (loss) on investments and foreign currency

 

(0.04

)

0.40

 

1.09

 

2.76

 

Provision for Federal Income Tax

 

 

 

 

 

Total from Investment Operations

 

(0.03

)

0.42

 

1.11

 

2.77

 

Less Distributions from:

 

 

 

 

 

 

 

 

 

Net investment income

 

(0.02

)

(0.02

)

(0.02

)(b)

(0.01

)

Realized capital gain

 

(0.43

)

(0.56

)

(0.66

)

(0.30

)

Paid-in capital

 

 

(0.29

)

(0.21

)

(0.47

)

Total Distributions

 

(0.45

)

(0.87

)

(0.89

)

(0.78

)

Change due to rights offering (c)

 

 

 

(0.05

)

 

Impact of shares issued in dividend reinvestment (d)

 

 

 

 

 

Total Distributions, Reinvestments and Rights Offering

 

(0.45

)

(0.87

)

(0.94

)

(0.78

)

Net asset value at end of period

 

$

8.37

 

$

8.85

 

$

9.30

 

$

9.13

 

Market price at end of period

 

$

7.54

 

$

8.28

 

$

9.56

 

$

9.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (e)

 

 

 

 

 

 

 

 

 

Based on net asset value

 

0.0

%(f)

5.0

%

13.0

%

40.7

%

Based on market price

 

(3.7

)%(f)

(4.4

)%

12.1

%

56.7

%

 

 

 

 

 

 

 

 

 

 

RATIOS AND SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

Net assets at end of period (millions)

 

$

1,294

 

$

1,368

 

$

1,372

 

$

1,153

 

Ratio of expenses to average net assets (g)

 

0.99

%(h)

0.99

%

1.01

%

1.04

%

Ratio of net investment income to average net assets (g)

 

0.32

%(h)

0.20

%

0.20

%

0.11

%

Portfolio turnover rate

 

38

%

46

%

57

%

64

%

 


(a)

Before provision for federal income tax.