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

 

 

Liberty All-Star Equity Fund

(Exact name of registrant as specified in charter)

 

1625 Broadway, Suite 2200, Denver, Colorado

 

80202

(Address of principal executive offices)

 

(Zip code)

 

Tane T. Tyler, Secretary
Liberty All-Star Equity Fund
1625 Broadway, Suite 2200
Denver, Colorado 80202

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

303-623-2577

 

 

Date of fiscal year end:

December 31

 

 

Date of reporting period:

December 31, 2006

 

 




Item 1.  Report of Shareholders




LIBERTY ALL-STAR® EQUITY FUND

 

 

 

 

 

2006 ANNUAL REPORT




A SINGLE INVESTMENT...

A DIVERSIFIED CORE PORTFOLIO

A single fund that offers:

·                  A diversified, multi-managed portfolio of growth and value stocks

·                  Exposure to many of the industries that make the U.S. economy the world’s dynamic

·                  Access to institutional quality investment managers

·                  Objective and ongoing manager evaluation

·                  Active portfolio rebalancing

·                  A quarterly fixed distribution policy

·                  The power of more than $1.3 billion in assets

·                  Actively managed, exchange traded fund listed on the New York Stock Exchange (ticker symbol: USA)

 

LIBERTY ALL-STAR EQUITY FUND

 

CONTENTS

1

President’s Letter

 

 

4

Foundation for the Future

 

 

6

Editorial Feature: Amid Change, Fundamentals Endure

 

 

10

Consistency of Returns (Chart)

 

 

11

Investment Managers/Portfolio Characteristics

 

 

12

Manager Roundtable

 

 

16

Investment Growth (Chart)

 

 

17

Table of Distributions and Rights Offerings

 

 

18

Top 20 Holdings and Economic Sectors

 

 

19

Major Stock Changes in the Fourth Quarter

 

 

20

Schedule of Investments

 

 

27

Financial Statements

 

 

30

Financial Highlights

 

 

31

Notes to Financial Statements

 

 

35

Report of Independent Registered Public Accounting Firm

 

 

36

Automatic Dividend Reinvestment and Cash Purchase Plan

 

 

37

Tax Information

 

 

38

Proxy Information

 

 

39

Trustees and Officers

 

 

42

Board Evaluation of New Agreements with ALPS Advisers

 

 

45

Privacy Policy

 

 

46

Description of Lipper Benchmark and Market Indices

 

Inside Back Cover: Fund Information

The views expressed in the President’s Letter, Editorial Feature and Manager Roundtable reflect the current views of the respective parties. 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 interest. References to specific company securities should not be construed as a recommendation or investment advice.




LIBERTY ALL-STAR® EQUITY FUND
PRESIDENT’S LETTER

Fellow Shareholders:

February 2007

 

By just about all accounts, 2006 was a rewarding year for equity investors. It might be more accurate, however, to say that it was an especially rewarding second half for equity investors. You may recall that one of the most widely recognized measures of the U.S. stock market, the S&P 500 Index, was ahead just 2.7 percent through June 30 of last year, and it looked as though it was on track for another mid-single-digit gain for the second consecutive year. After drifting lower through the first two weeks of July, the market found its footing and the S&P 500 Index rose sharply to finish the year up 15.8 percent.

There were several catalysts sparking the market’s strong second half performance. Perhaps the leading one was the Federal Reserve’s decision in September to leave short-term interest rates unchanged after 17 consecutive quarter-point increases. But other positive factors contributed as well. Energy prices, gasoline in particular, declined after a summer spike and crude oil prices ended the year just about where they started. Corporate earnings proved surprisingly resilient. Economic growth eased, but not too dramatically. Housing experienced a significant slowdown — it couldn’t stay white-hot forever — but did not collapse. And inflation, while a little above the Federal Reserve’s target range, flashed no ominous signals.

For shareholders of Liberty All-Star Equity Fund, the biggest news of 2006 was the change in the Fund’s adviser from Banc of America Investment Advisors, Inc. to ALPS Advisers, Inc. I’ll say more about this momentarily. First, let me address Fund investment performance.

For the full year, the Fund returned 9.7 percent with shares valued at net asset value (NAV) and 10.4 percent with shares valued at NAV with dividends reinvested. In terms of the market price of its shares, the Fund rose 11.7 percent. We were disappointed that the Fund’s NAV returns trailed the Lipper Large-Cap Core Mutual Fund Average (+13.5 percent) and the S&P 500 last year after outperforming both those benchmarks for the past three consecutive years.

Looking at the underlying reasons why the Fund trailed its relevant benchmarks during 2006, we would note it was primarily due to the underperformance of the approximately 40 percent of Fund assets allocated to growth stocks in general, and the higher multiple stocks specifically. Conversely, the approximately 60 percent of Fund assets allocated to value stocks outperformed both the Lipper Large-Cap Value Mutual Fund Average and the S&P 500. As Fund shareholders may be aware, value style stocks have experienced a prolonged period of outperformance — seven consecutive calendar years in which the Russell 3000 Value Index has outperformed the Russell 3000 Growth Index. Normally, one would have expected a rotation between these two styles by now, but the timing and magnitude of those shifts in leadership has and still remains unpredictable.

The Fund’s blending of both growth and value managers has served shareholders well as a core investment holding over long periods involving multiple style rotations. To that point, the Fund’s NAV results have outperformed the average manager in the Lipper Large-Cap Core Mutual Fund universe for the past three-, five-, 10-, 15- and 20-year trailing periods ending December 31, 2006. We experienced a similar situation in the late 1990s when value stocks were downtrodden and investors were only interested in growth- and technology-oriented funds. We can’t predict when we will experience another shift in leadership, but we do feel it would be as unwise now, as it would have been

www.all-starfunds.com

USA

 

1




in the 1999-2000 timeframe, to change our disciplined investment strategy of blending both growth and value managers within the Fund. The following tables trace key metrics for the fourth quarter and full year of 2006, as well as longer-term periods:

 

FUND STATISTICS AND SHORT-TERM PERFORMANCE
PERIODS ENDING DECEMBER 31, 2006

 

4TH QUARTER

 

2006

 

 

 

 

 

 

 

LIBERTY ALL-STAR EQUITY FUND

 

 

 

 

 

STATISTICS:

 

 

 

 

 

Year End Net Asset Value (NAV)

 

 

 

$8.76

 

Year End Market Price

 

 

 

$8.29

 

Year End Discount

 

 

 

5.4

%

Distributions

 

$0.22

 

$0.88

 

Market Price Trading Range

 

$7.76 to $8.31

 

$7.06 to $8.77

 

Premium/(Discount) Range

 

(5.4)% to (9.8)%

 

(3.4)% to (11.5)%

 

 

 

 

 

 

 

PERFORMANCE:

 

 

 

 

 

Shares Valued at NAV

 

6.2

%

9.7

%

Shares Valued at NAV with Dividends Reinvested

 

6.2

%

10.4

%

Shares Valued at Market Price with Dividends Reinvested

 

8.5

%

11.7

%

S&P 500 Index

 

6.7

%

15.8

%

Lipper Large-Cap Core Mutual Fund Average

 

6.3

%

13.5

%

NAV Reinvested Percentile Rank (1 = best; 100 = worst)

 

56th

 

81st

 

Number of Funds in Category

 

853

 

811

 

 

LONG-TERM PERFORMANCE SUMMARY

 

ANNUALIZED RATES OF RETURN

 

PERIODS ENDING DECEMBER 31, 2006

 

3 YEARS

 

5 YEARS

 

10 YEARS

 

15 YEARS

 

20 YEARS

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBERTY ALL-STAR EQUITY FUND

 

 

 

 

 

 

 

 

 

 

 

Shares Valued at NAV

 

9.3

%

6.6

%

7.9

%

9.6

%

10.9

%

Shares Valued at NAV with Dividends Reinvested

 

9.4

%

6.7

%

8.2

%

9.8

%

11.4

%

Shares Valued at Market Price with Dividends Reinvested

 

6.2

%

4.7

%

8.2

%

9.7

%

10.8

%

S&P 500 Index

 

10.5

%

6.2

%

8.4

%

10.6

%

11.8

%

Lipper Large-Cap Core Mutual Fund Average*

 

8.9

%

4.8

%

6.9

%

9.4

%

10.4

%

NAV Reinvested Percentile Ranking (1 = best; 100 = worst)

 

43rd

 

16th

 

27th

 

41st

 

26th

 

Number of Funds in Category

 

680

 

581

 

251

 

92

 

57

 

 


* Percentile ranks calculated using the Fund’s NAV Reinvested results within the Lipper Large-Cap Core Open-end Mutual Fund Universe.

Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are total returns, which include dividends, after deducting Fund expenses. The Fund’s reinvested returns assume that all of the Fund’s rights offerings were fully subscribed under the terms of each offering. Figures shown for the unmanaged Lipper benchmark and the 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 46.

 

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 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.

ANNUAL REPORT * DECEMBER 31, 2006

2




Returning to the change in the Fund’s Adviser, as shareholders know, Banc of America Investment Advisors, Inc., in December concluded an agreement with ALPS Holdings, Inc. and ALPS Advisers, Inc. (ALPS) to sell to ALPS its advisory business of managing the Liberty All-Star Equity Fund (and its companion Fund, the Liberty All-Star Growth Fund, Inc.). Shareholders will find more information about ALPS in the editorial section of this report, which immediately follows this letter.

The Fund’s management team and staff members continue to manage the Fund, having completed the transition to ALPS.  We believe that ALPS will afford the Fund and its shareholders some distinct benefits, specifically its marketing, shareholder servicing and wholesaling capabilities, which should help support the trading of the Fund in the marketplace.

In closing, I would like to draw your attention to our traditional manager roundtable in this report. It’s another chance to hear directly from the Fund’s five investment managers, who are well-recognized thought leaders in value and growth style investing. In addition to providing information on ALPS, this report’s editorial section also features a recap of the Fund’s key investment attributes.

Beyond the change in the Fund’s Adviser, 2006 marked the Fund’s 20th anniversary. In 1986, the Fund’s multi-managed, closed-end structure made it a pioneering investment for individual investors. Now, we can look back and say the Fund has proved its value through multiple market cycles and widely varied investment environments. We are excited about prospects for the future, and pledge to remain committed to the best interests of Fund shareholders. We are grateful for your ongoing support of the Fund and will do all in our power to maintain your trust and confidence.

Sincerely,

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star Equity Fund

3




 

LIBERTY ALL-STAR® EQUITY FUND
FOUNDATION FOR THE FUTURE

 

In October 2006, Liberty All-Star Equity Fund marked its 20th anniversary. Just weeks later, the Fund entered a new era with a new investment adviser, ALPS Advisers, Inc. In successfully completing the transition, the Fund has maintained its continuity and looks to a promising future.

 

For shareholders of Liberty All-Star Equity Fund, the biggest news of 2006 didn’t occur officially until December 18. On that date, ALPS Advisers, Inc. assumed the role of the Fund’s Investment Adviser from Banc of America Investment Advisors, Inc. Shareholders paved the way by voting to approve related advisory agreements and other proposals on November 21.

As a subsidiary of one of the largest financial organizations in the world, Banc of America Investment Advisors was a familiar name to shareholders. But, what about ALPS Advisers?

Its parent, ALPS Holdings, Inc. (ALPS), was established in 1985, the year before Liberty All-Star Equity Fund commenced operations. ALPS partners with a broad range of fund clients to provide them with a wide array of customized services that, taken together, makes ALPS a valuable source of turnkey service and support capabilities. At its founding, ALPS provided fund administration and fund distribution services. Over time, it has expanded its range of offerings to include fund accounting, transfer agency services, shareholder services, active distribution, legal, tax and compliance services. Today, ALPS provides fund administration services to funds with assets in

4




excess of $13 billion, and distribution services to funds with assets of more than $120 billion.

 

ALPS has traditionally conducted its business through two wholly-owned subsidiaries: ALPS Fund Services, Inc., a service company and SEC-registered transfer agent, and ALPS Distributors, Inc., an NASD-registered broker-dealer. The advisory agreement with Liberty All-Star Equity Fund is conducted through a third subsidiary, ALPS Advisers, Inc., which is a registered investment adviser with the Securities and Exchange Commission.

 

ALPS’ philosophy aligns well with that of the Fund. Quality is the company’s hallmark. As the Fund is oriented to the interests of its shareholders, ALPS is focused on its clients’ needs. ALPS is a leading provider of fund services and support, and is continually enhancing its value to its clients.

 

Beyond the philosophical fit, however, the Fund stands to gain tangible benefits by being part of the ALPS family. The marketing, shareholder service and wholesaling capabilities of ALPS should support the trading of the Fund in the marketplace. ALPS offers in-depth fund administration, accounting, compliance and distribution experience. In addition, ALPS has made growth of its asset management operations a key component of its business plan, meaning that effective management of the Fund is a strategic priority.

 

Of significance to shareholders, the investment operations of the Fund remain intact. The fundamental structure of the Fund as a closed-end, multi-managed, core equity vehicle is unchanged, and the five investment managers — representing value and growth investment styles — remain in place as well (subject, as always, to ongoing review by the Fund’s management team and Board of Trustees). Likewise, the Fund’s senior management staff — including its President and Senior Vice President — have transitioned to ALPS Advisers and remain Boston-based.

 

Bottom line: Liberty All-Star Equity Fund is well positioned to move into its second 20 years on the continued strength of a solid foundation for the future.

 

5




 

 

 

 

 

 

 

Amid change, fundamentals endure

 

Even as the Fund transitions to tomorrow, the underlying attributes that set it apart remain solidly in place.

 

When it was established, the Liberty All-Star Equity Fund brought together four key innovations in a single investment vehicle:

 

·    Multi-management

 

·    Real-time trading

 

·    Access to institutional quality managers

 

·    Ongoing monitoring and periodic rebalancing

 

Over time, these attributes have been enhanced by the Fund’s commitment to objectivity and alignment with shareholders’ best interests, and by its consistent distribution policy. Together, these attributes help to make the Fund a core equity holding for investors seeking diversification, income and the potential for long-term appreciation.

 

 

 

6




 

LIBERTY ALL-STAR® EQUITY FUND
AMID CHANGE, FUNDAMENTALS ENDURE

Multi-management for individual investors

 

Large institutional investors, such as endowment and pension plans, have traditionally employed multiple investment managers. When it was founded, Liberty All-Star Equity Fund became the first publicly traded, multi-managed, closed-end fund. Twenty years later, multi-management has gained broad acceptance — not only among institutions, but also with individual investors.

 

Real-time trading and liquidity

 

Owing to its closed-end structure, the Fund has a fixed number of shares that trade on the New York Stock Exchange and other exchanges. Share price is determined by supply and demand, and pricing is continuous—not just end-of-day, as it is with open-end mutual funds. Fund shares offer immediate liquidity, there are no annual sales fees and expense ratios are often lower than many comparable open-end mutual funds.

 

7




Access to institutional managers

 

The Fund’s investment managers invest primarily for pension funds, endowments, foundations and other institutions. By itself, that does not make them inherently better. But, because they are closely monitored by their institutional clients, these managers tend to be more disciplined and consistent in their investment process.

 

Monitoring and rebalancing

 

ALPS Advisers continuously monitors these investment managers to ensure that they are performing as expected and adhering to their style and strategy. If warranted, ALPS will recommend that the Board replace a manager, an action that has occurred 14 times in the Fund’s history. Periodic rebalancing maintains the Fund’s structural integrity and is a well recognized investment discipline.

 

8




Alignment and objectivity

 

Alignment with shareholders’ best interests and objective decision making help to ensure that the Fund is managed openly and equitably. A series of checks and balances and the selection of unaffiliated investment managers ensure the integrity of this key principle. In addition, the Fund is governed by a Board of Trustees that is elected by and responsible to the shareholders.

 

Distribution policy

 

Since 1988, the Fund has followed a policy of paying annual distributions on its shares at a rate of 10 percent of the Fund’s net asset value (paid quarterly at 2.5 percent per quarter), providing a systematic mechanism for distributing funds to shareholders.

 

9




 

LIBERTY ALL-STAR® EQUITY FUND
MULTI-MANAGEMENT HAS PRODUCED MORE CONSISTENT RETURNS

The narrative on the preceding four pages is intended to focus on the unique attributes of the Fund. The chart below demonstrates the long-term outcome of these attributes, particularly the Fund’s multi-management structure. Most mutual funds are run by a single portfolio manager or an internal team of managers pursuing a particular investment style, whether it’s growth or value. But styles go in and out of favor. A style that outperforms on a relative basis one year may disappoint the next, leading to higher volatility.

 

As discussed in our “Amid Change, Fundamentals Endure” feature, ALPS utilizes multi-management, that is, combining managers who practice different investment styles to reduce volatility while producing competitive returns.

 

All-Star’s long-term track record provides clear testimony to the value of the multi-management strategy. The chart below demonstrates that since All-Star’s first full calendar year of operation 20 years ago, the Fund has achieved better-than-average returns and better-than-average consistency compared with peer funds in the Lipper Large-Cap Core universe.

 

 

 

Each dot represents the precise 20-year return and consistency record ending December 31, 2006, of each fund in the universe of 38 open-end Large-Cap Core equity mutual funds (as classified by Lipper, Inc.) that has a 20-year history.

 

Consistency is measured by the volatility of “non-market” monthly returns, calculated by subtracting the return of the S&P 500 Index from each mutual fund’s return. The lower the volatility, the higher the consistency of results compared with the stock market.

10




LIBERTY ALL-STAR® EQUITY FUND
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS

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

MANAGERS’ DIFFERING INVESTMENT STRATEGIES ARE REFLECTED IN PORTFOLIO CHARACTERISTICS

The portfolio characteristics table below is a regular -feature of the Fund’s shareholder reports. It serves as a useful tool for understanding the value of a multi-managed portfolio. The characteristics are different for each of the Fund’s five investment managers. These differences are a reflection of the fact that each pursues a -different investment style. The shaded column highlights the characteristics of the Fund as a whole, while the final column shows portfolio characteristics for the S&P 500 Index.

 

PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 2006

INVESTEMENT SYTLE SPECTRUM

 

(UNAUDITED)

VALUE

 

GROWTH

 

 

 

 

Schneider

 

Pzena

 

Matrix

 

Chase

 

TCW

 

Total
Fund

 

S&P
500 Index

 

Number of Holdings

 

50

 

34

 

34

 

36

 

27

 

154

*

500

 

Percent of Holdings in Top 10

 

43

%

43

%

38

%

40

%

60

%

19

%

20

%

Weighted Average Market

Capitalization (billions)

 

$

26

 

$

74

 

$

106

 

$

92

 

$

52

 

$

70

 

$

101

 

Average Five-Year Earnings Per Share Growth

 

6

%

12

%

15

%

27

%

34

%

18

%

20

%

Dividend Yield

 

1.1

%

2.2

%

1.5

%

1.1

%

0.6

%

1.3

%

1.8

%

Price/Earnings Ratio

 

10

x

15

x

18

x

20

x

22

x

16

x

17

x

Price/Book Value Ratio

 

1.9

x

2.7

x

3.1

x

4.9

x

5.3

x

3.5

x

3.6

x

 


* Certain holdings are held by more than one manager.

11




 

LIBERTY ALL-STAR® EQUITY FUND
MANAGER ROUNDTABLE

In the face of ongoing change, the managers consistently adhere to their style and strategy

Stable short-term interest rates, lower energy prices and strong corporate earnings drove the stock market higher in 2006. In 2007, the drivers may — or may not — change, and outcomes are open to speculation. Based on comments from the Fund’s five investment managers, what remains firmly in place is consistent implementation of their style and strategy.

 

The Fund’s Investment Adviser, ALPS Advisers, recently had the opportunity to moderate the annual roundtable with the Fund’s five investment managers. From their respective points of view, the managers look at 2007, but mostly focus on longer-term trends before concluding with comments on a stock they have added recently to the portion of the Liberty All-Star Equity Fund portfolio that they manage. The participating investment managers and their styles are:

 

CHASE INVESTMENT COUNSEL CORPORATION

Portfolio Manager/David Scott, CFA, CIC,

Senior Vice President and Chief Investment Officer

Investment Style/Growth — Chase is a growth manager that has a valuation orientation to its investment process, seeking to invest in quality growth stocks that demonstrate consistent earnings growth but whose shares are reasonably priced.

MATRIX ASSET ADVISORS, INC.

Portfolio Manager/David A. Katz, CFA,

President and Chief Executive Officer

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

PZENA INVESTMENT MANAGEMENT, LLC

Portfolio Manager/Antonio DeSpirito, III

Principal and Portfolio Manager

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

SCHNEIDER CAPITAL MANAGEMENT CORPORATION

Portfolio Manager/Arnold C. Schneider, III, CFA,

President and Chief Investment Officer

Investment Style/Value — The firm practices a disciplined, fundamental approach to add value over time. Research focuses on uncovering new ideas and owning undervalued stocks before they experience a rebound in earnings and come to the attention of other investors.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Managers/Craig C. Blum, CFA, Managing Director,

and Stephen A. Burlingame, Managing Director

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

A number of market-moving factors affected 2006. These included the Federal Reserve standing pat on short-term interest rates, declining energy costs and continued strength in corporate earnings. Do you expect these to remain in place during 2007 — or do you anticipate the emergence of a new set of drivers? Let’s ask the growth managers to lead off.

 

BLUM (TCW — GROWTH): Fed policy and energy prices, the key drivers in 2006, are difficult to predict. The current Fed funds rate seems to be out of synch with the rest of the yield curve, indicating that the Fed may have overshot the normal spread over inflation. So, it seems reasonable that the Fed will leave rates unchanged or actually make a modest reduction. The decline in oil prices seems to have pushed the speculators out of the trading pits, resulting in more rational prices. Supply is being expanded and alternative technologies are being developed, but there can be long lead times between capital expenditures and results. Along the way, supply levels will probably remain vulnerable to geopolitical shocks. The dollar may be a bigger factor in 2007. If the economy slows and we are not able to improve our current account deficit the dollar may weaken further. This may slow consumer spending but create opportunities for exporters.

“The equity markets during this decade certainly reinforce the wisdom that most long-term investors should be well-diversified at all times …”

Arnie Schneider,

Schneider Capital Management (Value)

12




SCOTT (CHASE INVESTMENT COUNSEL — GROWTH): Many of the same factors that sparked 2006 should continue to influence the stock market in 2007. However, some new catalysts will impact the stock market. These include a weakening U.S. dollar, the timing and magnitude of the slowdown in U.S. economic activity, and rising speculation as evidenced by increased short-term trading and record merger and acquisition activity.

“The poor relative performance of growth stocks in this decade to date can be directly traced to the massive concentration in growth stock investments in 2000.”

David Scott,
Chase Investment Counsel (Growth)

What’s on the value managers’ radar for 2007?

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT — VALUE): We expect two countervailing forces this year, and it is unclear which one will garner the most attention. Stock prices might come under pressure from a measurable deceleration in corporate profit growth after five years of double-digit gains. On the positive side, a downshift in the economy and corporate profits might deliver the tame inflation data and softness in employment that afford the Fed room to start a modest easing of rates sometime in 2007.

KATZ (MATRIX ASSET ADVISORS — VALUE): We believe quite strongly that what we saw in 2006 is just the beginning of a multi-year trend in favor of larger stocks. Furthermore, while the catalyst for their resurgence might have been economic slowing, we do not believe that the continued success of these stocks is dependent on a slower economy. The fundamentals for large and mega-cap stocks are so compelling that all they really needed was the first push to get them back into market favor. Their fundamentals will sustain them from here.

DESPIRITO (PZENA INVESTMENT MANAGEMENT — VALUE): It is always difficult anticipating which factors will drive the market over the short term, and as long-term value investors we concentrate our efforts on understanding a company’s long-term earnings potential. That said, we expect that the sustainability of earnings growth and the outlook for inflation will continue to be two key drivers of market performance. The S&P 500 has just completed 14 straight quarters of double-digit earnings growth, which is likely not sustainable. Slower growth, however, along with low inflation could provide a favorable environment for equities in 2007.

A much-anticipated rotation that turned out not to occur in 2006 was the one from value to growth. For 2006, the Russell 3000 Value Index was ahead 22.3 percent for the year, while the Russell 3000 Growth Index was up 9.5 percent. This makes seven straight years of value outperformance. From the perspective of your own style (value or growth), what’s your point of view on this extended performance differential? Let’s ask the value managers for their perspective, followed by the growth managers.

 

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT — VALUE): After another year of huge outperformance by value stocks, we would not be surprised if performance leadership shifts to growth style investments. Broad swaths of the value universe appear unattractive to us from both a valuation and earnings perspective. Over the past seven years, the Russell 3000 Value Index has produced an annualized return of 8.4 percent, while the Russell 3000 Growth Index return is down an annualized 4.5 percent during the same period. If these indices were viewed as a company stock, a $30 investment seven years ago in Russell 3000 Value “Inc.” would now be worth $53, while the same investment in Russell 3000 Growth “Inc.” would have shriveled to $21.50.

“The dollar may be a bigger factor in 2007. If the economy slows and we are not able to improve our current account deficit the dollar may weaken further.”

Stephen Burlingame,
TCW (Growth)

KATZ (MATRIX ASSET ADVISORS — VALUE): The longer the cycle works against mega-cap stocks, the more dramatic and sustained will be the swing back in the other direction. The same, we believe, is true for growth versus value. The resurgence of mega-caps last year could be the precursor for growth’s revival this year. We would be pleased to see it, despite the fact that we are value oriented both by disposition and discipline. We believe that some growth stocks are undervalued today and will be the beneficiaries of the growth revival we expect in 2007.

DESPIRITO (PZENA INVESTMENT MANAGEMENT — VALUE): Although value stocks have outperformed for seven straight years, the nature of that outperformance has shifted dramatically. The earlier stages were driven by outperformance

13




of industrial cyclicals and other economically sensitive stocks. Over the last 18 months or so, however, leadership has been taken over by industries that are earning well in excess of their historical levels, such as energy and materials. Although these companies are predominantly represented in the value index, we don’t consider them values at today’s valuation levels, yet they have perpetuated the outperformance of the value indices. We have taken this opportunity to add former growth names that are now trading at attractive valuations.

 

BLUM (TCW — GROWTH): After a prolonged period of very meager profit growth some classic value industries benefited from incremental demand for commodity and industrial products from developing countries. As the price of oil, copper, zinc and other industrial materials rose, businesses in these industries saw their fortunes improve dramatically.  We are now at a point that valuations are discounting continued price and unit volume increases while economic growth seems to be slowing. To our thinking, these undifferentiated, economically sensitive cyclical stocks have had their day. In contrast, classic large capitalization growth stocks appear relatively cheap. These stocks have been out of favor since the tech bubble burst. Yet the “growth” companies have done a great job of generating profits.

SCOTT (CHASE INVESTMENT COUNSEL — GROWTH): The poor relative performance of growth stocks in this decade to date can be directly traced to the massive concentration in growth stock investments in 2000. By some measures, over 90 percent of investments in style allocation funds were growth related. While this concentration has declined significantly and now points to under-investment in growth, a catalyst such as an overall slowing of cyclical earnings growth may be necessary to shift relative performance from value to growth.

As 2007 heralds a move into the last few years of the decade, can you step back and give us your historical perspective on the ‘00s to date? Our question is driven by the thought that in a period of seven years investors have experienced a microcosm of stock market history: a bubble of historic proportions; a protracted bear market; a recovery to new highs for some indices; and, currently, a debate over the future direction of the market given a huge range of internal and exogenous events and data. Value managers, give us an historical perspective, please.

 

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT — VALUE): The equity markets during this decade certainly reinforce the wisdom that most long-term investors should be well-diversified at all times and possess nerves of steel to stay the course during the inevitable downdrafts that occur.

KATZ (MATRIX ASSET ADVISORS — VALUE): There is no doubt that the market has covered a lot of ground since the new millennium/century/decade began. We were somewhat puzzled by all the hoopla last year when the Dow Jones Industrial Average reached record territory and made new highs from its previous high water mark in 2000. To us, the real question was, why did it take so long to get back to where it was?

One important answer, of course, is multiple compression — the stock market is much less frothy and expensive than it was in 2000. Price/earnings ratios have dropped from the mid-20s to the mid-teens. That becomes very significant as we look at the future direction of the market. Another is that the past seven years have been rather unimpressive. Cumulatively over the period, the S&P 500 had been negative until the latter part of 2006.

 

“Since 2000 … price/earnings ratios have dropped from the mid-20s to the mid-teens. That becomes very significant as we look at the future direction of the market.”

David Katz,
Matrix Asset Advisers (Value)

DESPIRITO (PZENA INVESTMENT MANAGEMENT — VALUE): First, remember that this investment cycle started at a point where the discount for value stocks was the deepest that it had been in a generation, so we had a lot of room for value outperformance.  Despite the last seven years, our data tell us that the odds are still in the value investor’s favor to secure outperformance over a reasonable investment horizon.  The other interesting phenomenon we are seeing is “role reversal” — or growth investors buying what were traditionally considered value stocks — e.g., energy, commodities and industrial cyclicals — and value investors buying traditional growth names, such as pharmaceuticals and technology. 

Interesting thoughts. Where are the growth managers on this one?

BLUM (TCW — GROWTH): Add to your list the reality of terrorism on U.S. soil, numerous examples of high profile corporate malfeasance, artificially low interest rates that fueled real estate inflation, and historically high energy

14




and commodity prices and it has been a very challenging period for investors. Despite this, corporate profit growth has been outstanding and operating margins are at their highest level in history. Much of this has to do with the successful utilization of advances in technology, but also improved capital discipline.

 

“… we expect that the sustainability of earnings growth and the outlook for inflation will continue to be two key drivers of market performance.”

Antonio DeSpirito,
Pzena Investment Management  (Value)

SCOTT (CHASE INVESTMENT COUNSEL — GROWTH): Even though the U.S. stock market, as measured by the S&P 500 Index, has made little progress so far this decade, the period can be described as anything but uneventful. Beginning with perhaps the greatest stock market bubble of all time, the decade has seen a massive effort by the Federal Reserve to cushion the U.S. economy. Steep cuts in interest rates contributed to two additional bubbles in housing and debt, which have shaped the economy and today threaten its future. These factors — combined with globalization, worldwide geopolitical instability and oil-led commodity inflation — may lead to considerable uncertainty and volatility for stocks as the decade closes.

To conclude, please tell us about a stock that you have added recently to the portion of the Liberty All-Star Equity Fund portfolio that you manage and your rationale for buying it. We’ll ask the growth managers to start.

 

SCOTT (CHASE INVESTMENT COUNSEL — GROWTH): American International Group is a recent addition. AIG is the world’s largest insurer, selling life and property casualty insurance in 130 countries.  This high quality large capitalization growth company is benefiting from strong pricing and a lack of major catastrophes in recent quarters.  Since 30 percent of the company’s business comes from the Far East, the stock is considered a legitimate investment in the growth of China. Most importantly, AIG scores very well in our fundamental and technical models and is very reasonably priced, as it trades at less than 1 times both its historical and sustainable earnings growth rates.

BLUM (TCW — GROWTH): We have recently established a position in Autodesk,  the leading provider of computer-aided design software. The rapid growth of infrastructure projects around the globe coupled with the need to not waste evermore expensive building materials creates a powerful incentive to utilize Autodesk’s products. Moreover, we believe the company is in the process of transitioning its customer base to a new generation of three-dimensional modeling software products.

KATZ (MATRIX ASSET ADVISORS — VALUE): We recently bought Teva Pharmaceutical Industries, the Israel-based generic pharmaceutical leader, whose American Depositary Receipts are listed on the NYSE. We had successfully owned Teva several years ago, and admire its 20 percent market share in generics, strong 20 percent annual earnings growth and the quality of its management. Teva is somewhat unusual among generic manufacturers for also having a couple of significant proprietary drugs. We became buyers after the stock sold off more than 30 percent, allowing us to buy it at 14 times earnings compared to Teva’s historic 21 times multiple. Despite short-term earnings concerns, we expect mid-teens growth over the next three to five years.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT — VALUE): AGCO Corporation is the world’s third-largest manufacturer and distributor of agricultural equipment, with operations in Europe, North America and Brazil. There are positive trends both inside the company and in the industry that should lead to improved profitability. The company has the largest market share in the rapidly growing Brazilian market, which we believe should begin to recover from its recent slump. The company is also implementing a number of operational improvements inside its European operations. Finally, the global agriculture cycle looks promising in 2008 and beyond.

DESPIRITO (PZENA INVESTMENT MANAGEMENT — VALUE): We added Wal-Mart Stores, the world’s largest retailer, to the portfolio. Despite significant earnings growth, Wal-Mart’s stock price has gone nowhere for years and the company now trades at about 16 times this year’s First Call earnings estimate. We believe Wal-Mart can grow its bottom line as it has several plans in place to improve profits. These include increasing direct sourcing, reducing inventory to free up cash and offset the cost of entering new markets, making selective expense cuts, and moving to a more local merchandising and pricing model. In terms of consumer spending worries, we note that over half of Wal-Mart’s sales come from staples, such as food, pharmacy, tobacco, and health and beauty aids.

Many thanks to all for a very interesting discussion. We look forward to a productive 2007.

15




 

LIBERTY ALL-STAR® EQUITY FUND
INVESTMENT GROWTH

December 31, 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 December 31, 2006. For certain information, it also assumes full participation in rights offerings (see below). This graph 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 $48,117 (includes the December 31, 2006 value of the original investment of $13,817, plus distributions during the period of $33,183 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 $105,374.

 

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 $135,848 excluding the cost to fully participate in all the rights offerings under the terms of each offering which was $35,416.

 

 

 

 

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 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.

16




 

LIBERTY ALL-STAR® EQUITY FUND
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS

 

 

 

 

RIGHTS OFFERINGS

 

 

 

YEAR

 

PER SHARE
DISTRIBUTIONS

 

MONTH
COMPLETED

 

SHARES NEEDED TO PURCHASE
ONE ADDITIONAL SHARE

 

SUBSCRIPTION
PRICE

 

TAX 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

 

0.88

 

 

 

 

 

 

 

 

 

 


*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.

 

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.

17




 

LIBERTY ALL-STAR® EQUITY FUND
TOP 20 HOLDINGS AND ECONOMIC SECTORS

December 31, 2006

TOP 20 HOLDINGS*

 

PERCENT OF NET ASSETS

 

Microsoft Corp.

 

2.30

%

Countrywide Financial Corp.

 

2.10

 

Fannie Mae

 

2.07

 

JPMorgan Chase & Co.

 

2.07

 

Citigroup, Inc.

 

1.78

 

Schlumberger Ltd.

 

1.64

 

Pfizer, Inc.

 

1.57

 

Wal-Mart Stores, Inc.

 

1.52

 

American International Group, Inc.

 

1.50

 

Johnson & Johnson

 

1.39

 

MetLife, Inc.

 

1.39

 

Freddie Mac

 

1.34

 

General Electric Co.

 

1.33

 

Tyco International Ltd.

 

1.33

 

Reliant Energy, Inc.

 

1.33

 

Morgan Stanley

 

1.31

 

QUALCOMM, Inc.

 

1.28

 

Google, Inc., Class A

 

1.28

 

Cisco Systems, Inc.

 

1.26

 

Network Appliance, Inc.

 

1.19

 

 

 

30.98

%

 

ECONOMIC SECTORS*

 

PERCENT OF NET ASSETS

 

Financials

 

26.83

%

Information Technology

 

18.74

 

Consumer Discretionary

 

15.16

 

Health Care

 

12.50

 

Industrials

 

11.40

 

Energy

 

4.91

 

Consumer Staples

 

3.49

 

Utilities

 

2.24

 

Telecommunication Services

 

0.92

 

Materials

 

0.57

 

Other Net Assets

 

3.24

 

 

 

100.00

%

 


*                 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.

18




 

LIBERTY ALL-STAR® EQUITY FUND
MAJOR STOCK CHANGES IN THE FOURTH QUARTER

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

SECURITY NAME

 

PURCHASES (SALES)

 

SHARES AS OF 12/31/06

 

PURCHASES

 

 

 

 

 

Affiliated Computer Services, Inc.

 

107,375

 

107,375

 

America Movil SA de CV

 

173,900

 

173,900

 

American Express Co.

 

132,000

 

132,000

 

American International Group, Inc.

 

85,800

 

287,350

 

Cisco Systems, Inc.

 

211,700

 

633,500

 

EMC Corp.

 

390,600

 

390,600

 

Fidelity National Financial, Inc.

 

262,500

*

274,339

 

First American Corp.

 

143,200

 

143,200

 

Freddie Mac

 

95,750

 

271,450

 

Home Depot, Inc.

 

156,325

 

156,325

 

News Corp.

 

249,400

 

249,400

 

Schlumberger Ltd.

 

148,995

 

355,465

 

Teva Pharmaceutical Industries Ltd.

 

293,000

 

293,000

 

 

 

 

 

 

 

SALES

 

 

 

 

 

American Power Conversion Corp.

 

(287,700

)

371,150

 

CVS Corp.

 

(233,800

)

 

HCA, Inc.

 

(159,825

)

 

Hilton Hotels Corp.

 

(462,575

)

 

Kellogg Co.

 

(107,500

)

 

PepsiCo, Inc.

 

(172,600

)

 

Tidewater, Inc.

 

(137,000

)

 

Wells Fargo & Co.

 

(306,400

)

 

Wyeth

 

(106,200

)

178,000

 

 


*              Adjusted for spin-off.

19




 

LIBERTY ALL-STAR® EQUITY FUND
SCHEDULE OF INVESTMENTS

as of December 31, 2006

COMMON STOCKS (96.60%)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

CONSUMER DISCRETIONARY (15.00%)

 

 

 

 

 

Auto Components (1.13%)

 

 

 

 

 

Magna International, Inc., Class A

 

136,700

 

$

11,011,185

 

Visteon Corp. (a)

 

530,675

 

4,500,124

 

 

 

 

 

15,511,309

 

 

 

 

 

 

 

Hotels, Restaurants & Leisure (1.47%)

 

 

 

 

 

Carnival Corp.

 

50,925

 

2,497,871

 

Marriott International, Inc.

 

175,600

 

8,379,632

 

McDonald’s Corp.

 

209,000

 

9,264,970

 

 

 

 

 

20,142,473

 

 

 

 

 

 

 

Household Durables (2.14%)

 

 

 

 

 

Centex Corp.

 

133,000

 

7,483,910

 

Pulte Homes, Inc.

 

411,970

 

13,644,446

 

Whirlpool Corp.

 

98,800

 

8,202,376

 

 

 

 

 

29,330,732

 

 

 

 

 

 

 

Internet & Catalog Retail (0.87%)

 

 

 

 

 

Amazon.com, Inc. (a)

 

303,300

 

11,968,218

 

 

 

 

 

 

 

Media (4.54%)

 

 

 

 

 

Comcast Corp., Class A (a)

 

259,000

 

10,846,920

 

Liberty Global, Inc., Series A (a)

 

102,132

 

2,977,148

 

Liberty Global, Inc., Series C (a)

 

126,755

 

3,549,140

 

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

 

48,979

 

4,798,962

 

News Corp.

 

249,400

 

5,357,112

 

Omnicom Group, Inc.

 

27,700

 

2,895,758

 

Time Warner, Inc.

 

582,000

 

12,675,960

 

The Walt Disney Co.

 

269,600

 

9,239,192

 

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

 

510,850

 

7,381,782

 

Yell Group PLC (a)

 

225,750

 

2,513,536

 

 

 

 

 

62,235,510

 

 

 

 

 

 

 

Multi-line Retail (1.97%)

 

 

 

 

 

Dollar General Corp.

 

620,000

 

9,957,200

 

J.C. Penney Co., Inc.

 

120,300

 

9,306,408

 

Kohl’s Corp. (a)

 

113,100

 

7,739,433

 

 

 

 

 

27,003,041

 

 

 

 

 

 

 

Specialty Retail (2.88%)

 

 

 

 

 

AutoZone, Inc. (a)

 

49,000

 

5,662,440

 

GameStop Corp., Class A(a)

 

58,550

 

3,226,691

 

The Gap, Inc.

 

475,000

 

9,262,500

 

Home Depot, Inc.

 

156,325

 

6,278,012

 

Ross Stores, Inc.

 

285,000

 

8,350,500

 

TJX Companies, Inc.

 

236,650

 

6,739,792

 

 

 

 

 

39,519,935

 

 

 

 

 

 

 

See Notes to Schedule of Investments and Financial Statements

20




 

COMMON STOCKS (continued)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

CONSUMER STAPLES (3.49%)

 

 

 

 

 

Food & Staples Retailing (1.83%)

 

 

 

 

 

Wal-Mart Stores, Inc.

 

451,575

 

$

20,853,734

 

Walgreen Co.

 

92,900

 

4,263,181

 

 

 

 

 

25,116,915

 

 

 

 

 

 

 

Food Products (0.59%)

 

 

 

 

 

Sara Lee Corp.

 

350,050

 

5,961,351

 

Tyson Foods, Inc., Class A

 

129,150

 

2,124,518

 

 

 

 

 

8,085,869

 

 

 

 

 

 

 

Household Products (1.07%)

 

 

 

 

 

Colgate-Palmolive Co.

 

85,200

 

5,558,448

 

The Procter & Gamble Co.

 

141,800

 

9,113,486

 

 

 

 

 

14,671,934

 

 

 

 

 

 

 

ENERGY (4.91%)

 

 

 

 

 

Energy Equipment & Services (1.63%)

 

 

 

 

 

Schlumberger Ltd.

 

355,465

 

22,451,169

 

 

 

 

 

 

 

Oil, Gas & Consumable Fuels (3.28%)

 

 

 

 

 

BP PLC (b)

 

88,200

 

5,918,220

 

Cameco Corp.

 

109,350

 

4,423,208

 

ChevronTexaco Corp.

 

136,500

 

10,036,845

 

ConocoPhillips

 

61,000

 

4,388,950

 

Exxon Mobil Corp.

 

152,700

 

11,701,401

 

Massey Energy Co.

 

365,600

 

8,492,888

 

 

 

 

 

44,961,512

 

 

 

 

 

 

 

FINANCIALS (26.83%)

 

 

 

 

 

Capital Markets (3.01%)

 

 

 

 

 

The Bank of New York Co., Inc.

 

240,000

 

9,448,800

 

Franklin Resources, Inc.

 

24,100

 

2,655,097

 

Merrill Lynch & Co., Inc.

 

62,400

 

5,809,440

 

Morgan Stanley

 

220,400

 

17,947,172

 

UBS AG, Registered Shares

 

89,900

 

5,423,667

 

 

 

 

 

41,284,176

 

 

 

 

 

 

 

Commercial Banks (1.10%)

 

 

 

 

 

Comerica, Inc.

 

117,925

 

6,919,839

 

Commerce Bancorp, Inc.

 

232,140

 

8,187,578

 

 

 

 

 

15,107,417

 

 

 

 

 

 

 

Consumer Finance (2.01%)

 

 

 

 

 

American Express Co.

 

132,000

 

8,008,440

 

Capital One Financial Corp.

 

75,490

 

5,799,142

 

SLM Corp.

 

281,600

 

13,733,632

 

 

 

 

 

27,541,214

 

 

 

 

 

 

 

Diversified Financial Services (4.50%)

 

 

 

 

 

Bank of America Corp.

 

170,000

 

9,076,300

 

Citigroup, Inc.

 

437,425

 

24,364,572

 

JPMorgan Chase & Co.

 

586,550

 

28,330,365

 

 

 

 

 

61,771,237

 

 

See Notes to Schedule of Investments and Financial Statements

21




 

 

COMMON STOCKS (continued)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

Insurance (9.16%)

 

 

 

 

 

Allstate Corp.

 

194,700

 

$

12,676,917

 

American International Group, Inc.

 

287,350

 

20,591,501

 

Aon Corp.

 

140,650

 

4,970,571

 

Fidelity National Financial, Inc.

 

274,339

 

6,551,215

 

First American Corp.

 

143,200

 

5,825,376

 

Genworth Financial, Inc., Class A

 

208,800

 

7,143,048

 

Lincoln National Corp.

 

64,500

 

4,282,800

 

MetLife, Inc.

 

324,050

 

19,122,191

 

The Progressive Corp.

 

646,620

 

15,661,136

 

RenaissanceRe Holdings Ltd.

 

59,200

 

3,552,000

 

Torchmark Corp.

 

177,175

 

11,296,678

 

UnumProvident Corp.

 

68,225

 

1,417,716

 

XL Capital Ltd., Class A

 

173,600

 

12,502,672

 

 

 

 

 

125,593,821

 

 

 

 

 

 

 

Real Estate Investment Trusts (0.61%)

 

 

 

 

 

Annaly Capital Management, Inc.

 

603,450

 

8,393,989

 

 

 

 

 

 

 

Thrifts & Mortgage Finance (6.44%)

 

 

 

 

 

Countrywide Financial Corp.

 

678,400

 

28,798,080

 

Fannie Mae

 

479,166

 

28,457,669

 

Freddie Mac

 

271,450

 

18,431,455

 

Hudson City Bancorp

 

97,500

 

1,353,300

 

IndyMac Bancorp, Inc.

 

60,025

 

2,710,729

 

Washington Mutual, Inc.

 

189,037

 

8,599,293

 

 

 

 

 

88,350,526

 

 

 

 

 

 

 

HEALTH CARE (12.50%)

 

 

 

 

 

Biotechnology (2.98%)

 

 

 

 

 

Amgen, Inc. (a)

 

35,800

 

2,445,498

 

Genentech, Inc. (a)

 

143,700

 

11,658,381

 

Genzyme Corp. (a)

 

114,800

 

7,069,384

 

Gilead Sciences, Inc.(a)

 

138,800

 

9,012,284

 

MedImmune, Inc. (a)

 

331,800

 

10,740,366

 

 

 

 

 

40,925,913

 

 

 

 

 

 

 

Health Care Equipment & Supplies (2.09%)

 

 

 

 

 

Becton Dickinson & Co.

 

56,600

 

3,970,490

 

Boston Scientific Corp.(a)

 

458,800

 

7,882,184

 

Stryker Corp.

 

47,600

 

2,623,236

 

Varian Medical Systems, Inc. (a)

 

147,900

 

7,035,603

 

Zimmer Holdings, Inc. (a)

 

91,900

 

7,203,122

 

 

 

 

 

28,714,635

 

 

 

 

 

 

 

Health Care Providers & Services (1.59%)

 

 

 

 

 

AmerisourceBergen Corp.

 

121,275

 

5,452,524

 

Omnicare, Inc.

 

210,400

 

8,127,752

 

Triad Hospitals, Inc.(a)

 

54,175

 

2,266,140

 

WellPoint, Inc.(a)

 

75,300

 

5,925,357

 

 

 

 

 

21,771,773

 

 

 

 

 

 

 

See Notes to Schedule of Investments and Financial Statements

22




 

 

COMMON STOCKS (continued)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

Health Care Technology (0.29%)

 

 

 

 

 

Cerner Corp. (a)

 

87,400

 

$

3,976,700

 

 

 

 

 

 

 

Pharmaceuticals (5.55%)

 

 

 

 

 

AstraZeneca PLC (b)

 

58,100

 

3,111,255

 

Bristol-Myers Squibb Co.

 

441,225

 

11,613,042

 

Johnson & Johnson

 

289,825

 

19,134,247

 

Novartis AG (b)

 

45,000

 

2,584,800

 

Pfizer, Inc.

 

831,325

 

21,531,317

 

Teva Pharmaceutical Industries Ltd. (b)

 

293,000

 

9,106,440

 

Wyeth

 

178,000

 

9,063,760

 

 

 

 

 

76,144,861

 

 

 

 

 

 

 

INDUSTRIALS (11.40%)

 

 

 

 

 

Aerospace & Defense (3.57%)

 

 

 

 

 

The Boeing Co.

 

56,925

 

5,057,217

 

Bombardier, Inc., Class B (a)

 

1,040,325

 

3,523,804

 

General Dynamics Corp.

 

137,400

 

10,215,690

 

Goodrich Corp.

 

67,950

 

3,095,122

 

Lockheed Martin Corp.

 

133,700

 

12,309,759

 

Rockwell Collins, Inc.

 

127,000

 

8,037,830

 

United Technologies Corp.

 

108,400

 

6,777,168

 

 

 

 

 

49,016,590

 

 

 

 

 

 

 

Air Freight & Logistics (0.67%)

 

 

 

 

 

CH Robinson Worldwide, Inc.

 

87,800

 

3,590,142

 

Expeditors International of Washington, Inc.

 

137,090

 

5,552,145

 

 

 

 

 

9,142,287

 

 

 

 

 

 

 

Airlines (0.09%)

 

 

 

 

 

Southwest Airlines Co.

 

77,925

 

1,193,811

 

 

 

 

 

 

 

Electrical Equipment (0.83%)

 

 

 

 

 

American Power Conversion Corp.

 

371,150

 

11,353,479

 

 

 

 

 

 

 

Industrial Conglomerates (2.84%)

 

 

 

 

 

3M Co.

 

33,000

 

2,571,690

 

General Electric Co.

 

489,200

 

18,203,132

 

Tyco International Ltd.

 

598,450

 

18,192,880

 

 

 

 

 

38,967,702

 

 

 

 

 

 

 

Machinery (2.29%)

 

 

 

 

 

AGCO Corp. (a)

 

273,525

 

8,462,864

 

Danaher Corp.

 

124,800

 

9,040,512

 

Navistar International Corp. (a)

 

304,475

 

10,178,599

 

Paccar, Inc.

 

57,000

 

3,699,300

 

 

 

 

 

31,381,275

 

 

See Notes to Schedule of Investments and Financial Statements

23




 

COMMON STOCKS (continued)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

Road & Rail (1.11%)

 

 

 

 

 

CSX Corp.

 

275,000

 

$

9,468,250

 

Union Pacific Corp.

 

63,000

 

5,797,260

 

 

 

 

 

15,265,510

 

 

 

 

 

 

 

INFORMATION TECHNOLOGY (18.74%)

 

 

 

 

 

Communications Equipment (3.34%)

 

 

 

 

 

Alcatel-Lucent

 

765,398

 

10,883,960

 

Cisco Systems, Inc. (a)

 

633,500

 

17,313,555

 

QUALCOMM, Inc.

 

465,605

 

17,595,213

 

 

 

 

 

45,792,728

 

 

 

 

 

 

 

Computers & Peripherals (2.59%)

 

 

 

 

 

Dell, Inc.(a)

 

555,725

 

13,943,141

 

EMC Corp. (a)

 

390,600

 

5,155,920

 

Network Appliance, Inc.(a)

 

417,215

 

16,388,205

 

 

 

 

 

35,487,266

 

 

 

 

 

 

 

Electronic Equipment & Instruments (2.04%)

 

 

 

 

 

AU Optronics Corp.(a)

 

534,528

 

7,381,831

 

Celestica, Inc.(a)

 

301,275

 

2,352,958

 

Symbol Technologies, Inc.

 

684,000

 

10,218,960

 

Vishay Intertechnology, Inc.(a)

 

595,000

 

8,056,300

 

 

 

 

 

28,010,049

 

 

 

 

 

 

 

Internet Software & Services (2.24%)

 

 

 

 

 

eBay, Inc. (a)

 

324,800

 

9,766,736

 

Google, Inc., Class A (a)

 

38,200

 

17,590,336

 

Yahoo!, Inc. (a)

 

128,800

 

3,289,552

 

 

 

 

 

30,646,624

 

 

 

 

 

 

 

IT Services (1.95%)

 

 

 

 

 

Affiliated Computer Services, Inc. (a)

 

107,375

 

5,244,195

 

BearingPoint, Inc. (a)

 

529,180

 

4,164,647

 

Computer Sciences Corp. (a)

 

50,950

 

2,719,201

 

First Data Corp.

 

393,200

 

10,034,464

 

The Western Union Co.

 

206,700

 

4,634,214

 

 

 

 

 

26,796,721

 

 

 

 

 

 

 

Semiconductors & Semiconductor Equipment (1.33%)

 

 

 

 

 

Analog Devices, Inc.

 

29,100

 

956,517

 

Intel Corp.

 

372,000

 

7,533,000

 

International Rectifier Corp. (a)

 

103,278

 

3,979,301

 

Novellus Systems, Inc. (a)

 

167,900

 

5,779,118

 

 

 

 

 

18,247,936

 

 

See Notes to Schedule of Investments and Financial Statements

24




 

COMMON STOCKS (continued)

 

SHARES

 

MARKET VALUE

 

 

 

 

 

 

 

Software (5.25%)

 

 

 

 

 

Activision, Inc. (a)

 

11,100

 

$

191,364

 

Adobe Systems, Inc. (a)

 

126,400

 

5,197,568

 

Autodesk, Inc. (a)

 

91,660

 

3,708,564

 

CA, Inc.

 

354,875

 

8,037,919

 

Microsoft Corp.

 

1,054,775

 

31,495,581

 

Oracle Corp. (a)

 

944,975

 

16,196,871

 

Salesforce.com, Inc. (a)

 

197,400

 

7,195,230

 

 

 

 

 

72,023,097

 

 

 

 

 

 

 

MATERIALS (0.57%)

 

 

 

 

 

Chemicals (0.54%)

 

 

 

 

 

Cytec Industries, Inc.

 

36,475

 

2,061,202

 

Praxair, Inc.

 

91,200

 

5,410,896

 

 

 

 

 

7,472,098

 

 

 

 

 

 

 

Paper & Forest Products (0.03%)

 

 

 

 

 

Louisiana-Pacific Corp.

 

16,700

 

359,551

 

 

 

 

 

 

 

TELECOMMUNICATION SERVICES (0.92%)

 

 

 

 

 

Wireless Telecommunication Services (0.92%)

 

 

 

 

 

America Movil SA de CV (b)

 

173,900

 

7,863,758

 

Sprint Nextel Corp.

 

254,200

 

4,801,838

 

 

 

 

 

12,665,596

 

 

 

 

 

 

 

UTILITIES (2.24%)

 

 

 

 

 

Electric Utilities (1.33%)

 

 

 

 

 

Reliant Energy, Inc. (a)

 

1,280,100

 

18,190,221

 

 

 

 

 

 

 

Multi-Utilities (0.91%)

 

 

 

 

 

Sempra Energy

 

130,300

 

7,292,891

 

Wisconsin Energy Corp., Series C

 

110,200

 

5,230,092

 

 

 

 

 

12,522,983

 

 

 

 

 

 

 

TOTAL COMMON STOCKS (Cost $1,169,486,196)

 

 

 

1,325,110,403

 

 

 

 

 

 

 

PREFERRED STOCKS (0.16%)

 

 

 

 

 

 

 

 

 

 

 

CONSUMER DISCRETIONARY (0.16%)

 

 

 

 

 

Automobiles (0.16%)

 

 

 

 

 

General Motors Corp., Series C (Cost $1,707,639)

 

97,150

 

2,207,248

 

 

See Notes to Schedule of Investments and Financial Statements

25




 

SHORT TERM INVESTMENTS (3.87%)

 

PAR VALUE

 

  MARKET VALUE  

 

 

 

 

 

 

 

REPURCHASE AGREEMENT (3.87%)

 

 

 

 

 

Repurchase agreement with State Street Bank & Trust Co., dated 12/29/2006, due 01/02/2007 at 4.65%, collateralized by several U.S. Treasury Bonds with various maturity dates, market value of $54,146,416 (repurchase proceeds of $53,109,426) (Cost $53,067,000)

 

$

53,067,000

 

$

53,067,000

 

 

 

 

 

 

 

TOTAL INVESTMENTS (100.63%) (COST $1,224,260,835) (C)

 

 

 

1,380,384,651

 

 

 

 

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS (– 0.63%)

 

 

 

(8,618,604

)

NET ASSETS (100.00%)

 

 

 

$

1,371,766,047

 

NET ASSET VALUE PER SHARE (156,669,818 SHARES OUTSTANDING)

 

 

 

$

8.76

 

 

Notes to Schedule of Investments:

(a)   Non-income producing security

(b)   American Depositary Receipt

(c)   Cost of investments for federal income tax purposes is $1,235,171,545.

Gross unrealized appreciation and depreciation based on cost of investments and foreign currency for federal income tax purposes at December 31, 2006 is as follows:

Gross unrealized appreciation

 

$

189,984,027

 

Gross unrealized depreciation

 

(44,770,921

)

Gross unrealized depreciation on foreign currency

 

(469

)

Net unrealized appreciation

 

$

145,212,637

 

 

See Notes to Financial Statements

26




LIBERTY ALL-STAR® EQUITY FUND

STATEMENT OF ASSETS AND LIABILITIES

December 31, 2006

ASSETS:

 

 

 

 

 

 

 

Investments at market value (identified cost $1,224,260,835)

 

$

1,380,384,651

 

Cash

 

2,426

 

Foreign currency, at value (Cost $26,047)

 

26,001

 

Receivable for investments sold

 

11,849,018

 

Dividends and interest receivable

 

1,175,344

 

Foreign tax reclaim receivable

 

895

 

 

 

 

 

 

TOTAL ASSETS

 

1,393,438,335

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Payable for investments purchased

 

3,010,461

 

Distributions payable to shareholders

 

17,293,846

 

Investment advisory fees payable

 

803,011

 

Payable for administration, pricing and bookkeeping fees

 

216,537

 

Accrued expenses

 

348,433

 

 

 

 

 

 

TOTAL LIABILITIES

 

21,672,288

 

 

 

 

 

NET ASSETS

 

$

1,371,766,047

 

 

 

 

 

NET ASSETS REPRESENTED BY:

 

 

 

 

 

 

 

Paid-in capital (unlimited number of shares of beneficial interest

without par value authorized; 156,669,818 shares outstanding)

 

$

1,226,553,410

 

Accumulated net realized loss on investments and foreign currency transactions

 

(10,910,710)

 

Net unrealized appreciation on investments and foreign currency translations

 

156,123,347

 

 

 

 

 

TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES OF BENEFICIAL INTEREST ($8.76 PER SHARE)

 

$

1,371,766,047

 

 

See Notes to Financial Statements

27




 

LIBERTY ALL-STAR® EQUITY FUND
STATEMENT OF OPERATIONS

Year Ended December 31, 2006

INVESTMENT INCOME:

 

 

 

Dividends

 

$

17,106,591

 

Dividends from affiliates

 

360,440

 

Interest

 

1,826,544

 

Miscellaneous income

 

5,840

 

 

 

 

 

TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $50,416)

 

19,299,415

 

 

EXPENSES:

Investment advisory fee

 

9,500,251

 

Administrative fee

 

2,368,052

 

Pricing and bookkeeping fees

 

173,963

 

Audit Fees

 

48,338

 

Custodian fee

 

83,229

 

Legal fees

 

229,970

 

NYSE fee

 

154,242

 

Transfer agent fees

 

114,526

 

Shareholder communication expenses

 

418,938

 

Trustees’ fees and expense

 

150,156

 

Miscellaneous expenses

 

309,802

 

 

TOTAL EXPENSES

 

 

 

13,551,467

 

 

 

 

 

 

 

CUSTODY EARNINGS CREDIT

 

 

 

(4,162

)

 

 

 

 

 

 

NET EXPENSES

 

 

 

13,547,305

 

 

 

 

 

 

 

NET INVESTMENT INCOME

 

 

 

5,752,110

 

 

 

 

 

 

 

REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:

 

 

 

 

 

Net realized gain on:

 

 

 

 

 

Investments

 

124,736,126

 

 

 

Foreign currency transactions

 

7,321

 

 

 

 

 

 

 

 

 

Net realized gain on investment transactions and foreign currency

 

 

 

124,743,447

 

 

 

 

 

 

 

Net unrealized appreciation on investments and foreign currency:

 

 

 

 

 

Beginning of year

 

163,702,429

 

 

 

End of year

 

156,123,347

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation

 

 

 

(7,579,082

)

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

 

 

 

$

122,916,475

 

 

See Notes to Financial Statements

28




 

LIBERTY ALL-STAR® EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

OPERATIONS:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

5,752,110

 

$

2,558,482

 

Net realized gain on investment transactions and foreign currency

 

124,743,447

 

83,342,615

 

Net change in unrealized appreciation

 

(7,579,082)

 

(20,825,770)

 

Net increase in net assets resulting from operations

 

122,916,475

 

65,075,327

 

 

 

 

 

 

 

DISTRIBUTIONS DECLARED FROM:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

(5,753,686)

 

(2,557,705)

 

Net realized gain on investments

 

(124,889,788)

 

(84,322,544)

 

Paid-in capital

 

(5,402,964)

 

(43,732,531)

 

Total distributions

 

(136,046,438)

 

(130,612,780)

 

 

 

 

 

 

 

CAPITAL TRANSACTIONS:

 

 

 

 

 

 

 

 

 

 

 

Dividend reinvestments

 

16,734,378

 

61,508,410

 

Total increase (decrease) in net assets

 

3,604,415

 

(4,029,043)

 

 

 

 

 

 

 

NET ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

1,368,161,632

 

1,372,190,675

 

End of year (including undistributed net investment income of $0 and $43,520, respectively)

 

$

1,371,766,047

 

$

1,368,161,632

 

 

See Notes to Financial Statements

29




 

LIBERTY ALL-STAR® EQUITY FUND
FINANCIAL HIGHLIGHTS

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

PER SHARE OPERATING PERFORMANCE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value at beginning of year

 

$

8.85

 

$

9.30

 

$

9.13

 

$

7.14

 

$

10.65

 

Income from Investment Operations:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

0.04

 

0.02

 

0.02

 

0.01

 

0.01

 

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

 

0.75

 

0.40

 

1.09

 

2.76

 

(2.56)

 

Total from Investment Operations

 

0.79

 

0.42

 

1.11

 

2.77

 

(2.55)

 

Less Distributions from:

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

(0.04)

 

(0.02)

 

(0.02)