LIBERTY ALL[star]STAR GROWTH FUND, INC.
NEW YORK STOCK EXCHANGE TRADING SYMBOL: ASG
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lamco.com
INDEPENDENT AUDITORS
KPMG Peat Marwick llp
99 High Street
Boston, Massachusetts 02110
CUSTODIAN
Boston Safe Deposit & Trust Company
One Cabot Road
Medford, Massachusetts 02155
INVESTOR ASSISTANCE,
TRANSFER AND DIVIDEND
DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
LEGAL COUNSEL
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
DIRECTORS
Robert J. Birnbaum*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
OFFICERS
Harold W. Cogger, Chairman of the Board of Directors
Richard R. Christensen, President & Chief Executive Officer
William R. Parmentier, Jr., Vice President & Chief Investment Officer
Timothy J. Jacoby, Treasurer
Peter L. Lydecker, Controller
John L. Davenport, Secretary
*Member of the audit committee.
Liberty Asset Management Company, the Fund's manager,
is one of the Liberty Financial Companies (NYSE: L).
[logo] LIBERTY
FINANCIAL
[recycled symbol] Printed on Recycled Paper with Soybean Inks D/75m/10-96
[logo] LIBERTY ALL[star]STAR
GROWTH FUND, Inc.
3rd
Quarter Report
1996
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Third Quarter Report
Chairman's Letter
To Our Fellow Shareholders: November 1996
The net asset value (NAV) of a common share of the Fund rose from $11.31 on
June 30, 1996 to $11.90 on September 30, 1996. The market price of a share of
the Fund traded in a range from $8.375 to $9.75 before closing the quarter at
$9.75. The ending price represented a discount to NAV of 18.1 percent
compared with a discount to NAV of 14.9 percent on June 30, 1996. Key
investment results and comparisons are noted in the box.
*******************************[boxed text]******************************
Fund Performance for the third quarter and nine months ended September
30, 1996. Figures shown for the Fund and the Lipper Growth Mutual Fund
Average are total returns, which include income, less fees and other
operating expenses. Figures shown for the unmanaged S&P 500 and Dow Jones
indices are total returns including income, and for the unmanaged NASDAQ
Index are total returns excluding income.
Third Latest
Quarter Nine Months
------------- ----------------
Liberty All-Star Growth Fund, Inc.:
Shares Valued at Net Asset Value 5.2% 12.8%
Shares Valued at Market Price
(Dividends Reinvested) 1.3% 4.0%
Lipper Growth Mutual Fund Average 2.9% 13.2%
S&P 500 Stock Index 3.1% 13.5%
Dow Jones Industrial Average 4.6% 16.8%
Nasdaq Composite Index 3.5% 16.6%
Fund's Closing Price Range $9.75 to $9.75 to
$8.50 $8.50
Fund's Discount Range 14.5% to 8.0% to
19.9% 19.9%
**************************************************************************
The stock market continued its advance for the seventh quarter in a row. As
the box at the left shows, the Fund's net asset value was up 5.2 percent,
which compares favorably with 2.9 percent for the Lipper Growth Mutual Fund
Average (the Fund's primary benchmark comparison) and 3.1 percent for the S&P
500 Stock Index. For the nine months of 1996, the Fund's net asset value was
up 12.8 percent compared with 13.2 percent for the Lipper Average and 13.5
percent for the S&P 500.
The broad market correction which began about the end of May bottomed out in
July. Then the market rebounded to levels above the previous highs by the
end of the third quarter and also set new highs in October. Richard
Christensen's President's Letter, which follows, provides additional
perspective.
Please note the announcement on page 4 of the annual distribution of $1.02
per share, nearly all of which is net realized capital gains. The
distribution has been declared by the Board of Directors payable in newly
issued shares to all shareholders except those non-participants in the
Dividend Reinvestment Plan who specifically elect to take the distribution in
cash by signing and returning an option card. In this way, all shareholders
will have the opportunity to reinvest their capital gains in the Fund so that
these gains can build additional value through compounding.
Sincerely,
/s/ Harold W. Cogger
Harold W. Cogger
Chairman of the Board of Directors
Liberty All-Star Growth Fund, Inc.
1
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Third Quarter Report
President's Letter
To Our Fellow Shareholders: November 1996
This summer's market correction was noteworthy mainly in the quickness of the
rebound to new highs. The S&P 500 Stock Index peaked at 679 on May 24,
dropped to 627 on July 24, then rose to a new high of 687 on September 30.
So, the depth of the correction was nearly eight percent over a period of two
months, and within only about another two months the market was back to new
highs and it set several additional highs in the first half of October. The
Nasdaq Composite Index showed a comparable pattern except that its depth of
correction at 17 percent was about twice that of the S&P 500.
In the semi-annual report, we pointed out that the S&P 500 had not had a
correction of as much as 10 percent in the nearly six year period since 1990,
the longest such period without such a correction in the 40 year history of
the S&P 500 Stock Index. That record is still intact.
The bull market appears also to remain intact, but at these levels it is
vulnerable to negative surprises in corporate earnings, inflation, interest
rates and political developments.
The table below shows all the corrections of more than seven percent in the
S&P 500 for the approximately ten year period beginning in January 1987. In
the four years 1987 through 1990, we had three such corrections, including
the Crash of '87 and the severe correction of '90. In the six years since
1990, we have had only two such corrections, both mild compared with those of
1987 and 1990. The 1996 correction had the shortest recovery time of all five
corrections.
<TABLE>
<CAPTION>
Year Depth of Correction Time Recovery Time Total Time
Correction Correction (from (from peak to (from trough to (from previous
Began peak to trough) trough) new peak) peak to new peak)
-------------- ------------------- ------------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
1987 34% 3 months 20 months 23 months
1989 10 4 4 8
1990 20 3 4 7
1994 9 2 10 12
1996 8 2 2 4
</TABLE>
Provident Investment Counsel, Inc., which is one of the Fund's three
Portfolio Managers, is the subject of the manager interview beginning on page
6. Jeff Miller, Managing Director, discusses the firm's investment philosophy
and decision making process as well as recent changes in the portfolio.
Sincerely,
/s/ Richard R. Christensen
Richard R. Christensen
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc. and
Liberty Asset Management Company
2
<PAGE>
Commentary
Managers' Differing Investment Styles
Are Reflected in Portfolio Characteristics
The Portfolio Characteristics table on this page 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 three Portfolio Managers. These differences are a
reflection of the fact that each pursues an individual Investment Style. The
shaded column highlights the characteristics of the Fund as a whole, while
the final column shows portfolio characteristics for the entire S&P 500 Stock
Index.
The Investment Styles practiced by the Fund's three Portfolio Managers are:
Mississippi Valley Advisors Inc. (MVA)
Small capitalization growth companies that sell at a reasonable current price
relative to anticipated future earnings.
Oppenheimer Capital
Contrarian holdings being overlooked and undervalued by investors.
Provident Investment Counsel, Inc.
Large capitalization companies with fast growing earnings and bright
prospects.
Portfolio Characteristics
As of
September 30, 1996
<TABLE>
<CAPTION>
Total S&P
MVA Oppenheimer Provident Fund 500 Index
------------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Weighted Average Market
Capitalization (billions) $ 1.2 $18.1 $23.2 $14.4 $35.6
================================ ========================= ============== ========= ==============
Number of Holdings 70 31 47 145 500
================================ ========================= ============== ========= ==============
Percent of Holdings
in S&P 500 7.3% 70.6% 68.6% 49.4% --
================================ ========================= ============== ========= ==============
Dividend Yield 0.8% 1.6% 0.6% 1.0% 2.2%
================================ ========================= ============== ========= ==============
Average Price/
Earnings Ratio 18.4x 13.3x 30.6x 18.6x 18.6x
================================ ========================= ============== ========= ==============
Average Price/
Book Value Ratio 2.2x 2.4x 6.0x 2.9x 3.1x
================================ ========================= ============== ========= ==============
Average Five-Year
Earnings Per Share Growth 23% 30% 28% 28% 21%
================================ ========================= ============== ========= ==============
</TABLE>
3
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Annual Distribution Declared
On November 6, the Board of Directors declared the annual distribution which,
when combined with a distribution declared in September, will total $1.02 per
share, almost all of which will consist of net realized capital gains. The
distribution has been declared payable in newly issued shares to all
shareholders except those non-participants in the Dividend Reinvestment Plan
who specifically elect ("opt-out") to take the distribution in cash by
signing and returning an option card. The shares will be valued at the lower
of market value or net asset value (but not at a discount of more than five
percent from market value).
The combined distribution will be payable on December 27, 1996 to
shareholders of record on November 20, 1996. Shortly after the record date, a
mailing will go out to all registered shareholders who are not participating
in the Dividend Reinvestment Plan. The mailing will include an option card,
which must be signed and returned by December 17, 1996 if the shareholder
wishes to receive the distribution in cash. No action is required to receive
the dividend in shares. Shareholders whose shares are held in the name of a
brokerage firm, bank or other nominee should contact their brokerage firm,
bank or nominee as to whether they want the distribution in shares or cash.
By taking newly issued shares, shareholders are able to reinvest their
capital gains in the Fund so that these gains can build additional value
through compounding.
Major Stock Changes in the Third Quarter
The following are the major ($300,000 or more) stock changes--both additions
and reductions--that were made in the Fund's portfolio during the third
quarter of 1996.
Shares
-------------------------------------
Held
Security Name Additions Reductions 9/30/96
--------------------------------- ------------ ------------- ----------
AES Corp. 12,000 12,000
Cityscape Financial Corp. 23,400 23,400
Mirage Resorts 24,000 24,000
R. R. Donnelley & Sons Co. 10,000 35,000
Research Medical, Inc. 25,000 25,000
Safeway, Inc. 18,000 18,000
Tejas Gas Corp. 10,700 10,700
Tidewater, Inc. 10,000 10,000
Triton Energy Group Corp. 7,000 27,000
Weatherford Enterra, Inc. 17,538 17,538
Alco Standard Corp. (12,000) 0
American RE Corp. (18,000) 0
Automatic Data Processing, Inc. (24,000) 0
Barrett Resources Corp. (10,200) 0
Flowers Industries, Inc. (23,000) 32,000
Hewlett-Packard Co. (9,000) 0
Murphy Oil Corp. (8,000) 9,000
Palmer Wireless, Inc. (18,000) 0
Sonoco Products Co. (22,000) 0
3Com Corp. (18,000) 0
Unilever NV ADR (8,000) 0
United Companies Financial Corp. (8,000) 15,500
United Healthcare Corp. (13,000) 0
U.S. Robotics Corp. (16,000) 0
**********************************[boxed text]********************************
Dividend Reinvestment Plan
Through its Automatic Dividend Reinvestment and Cash Purchase Plan (the
Plan), the Fund offers shareholders the opportunity to have their dividends
and distributions automatically reinvested in additional shares of the Fund.
Each registered shareholder is considered a participant in the Plan, unless
the shareholder elects otherwise.
Participating shareholders are kept apprised of the status of their account
through periodic statements.
For more information or for a copy of the Plan brochure please call Investor
Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern time.
******************************************************************************
4
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Top 50
Holdings
As of
September 30, 1996
<TABLE>
<CAPTION>
Rank
as of Value Percent of
Rank 6/30/96 Security Name ($000) Net Assets
- ----- --------- ----------------------------------------------- -------- -------------
<S> <C> <C> <C> <C>
1 1 Microsoft Corp. $2,638 2.0%
2 3 Federal Home Loan Mortgage Corp. 2,349 1.7
3 2 Federal National Mortgage Assoc. 2,093 1.6
4 5 Pfizer, Inc. 1,978 1.5
5 4 First Data Corp. 1,892 1.4
6 8 Monsanto Co. 1,825 1.4
7 6 Citicorp 1,813 1.3
8 12 Computer Associates International, Inc. 1,793 1.3
9 22 Intel Corp. 1,718 1.3
10 11 LucasVarity PLC-ADR* 1,654 1.2
11 7 Oracle Corp. 1,622 1.2
12 14 ACE, Limited 1,586 1.2
13 10 McDonnell Douglas Corp. 1,575 1.2
14 17 Travelers Group, Inc. 1,474 1.1
15 30 MBNA Corp. 1,460 1.1
16 34 AFLAC, Inc. 1,420 1.1
17 20 Countrywide Credit Industries, Inc. 1,409 1.0
18 37 SunGard Data Systems, Inc. 1,404 1.0
19 15 EXEL Limited 1,390 1.0
20 28 Hercules, Inc. 1,369 1.0
21 13 Cisco Systems, Inc. 1,365 1.0
22 24 Lockheed Martin Corp. 1,352 1.0
23 21 Morgan Stanley Group, Inc. 1,343 1.0
24 16 HFS, Inc. 1,338 1.0
25 29 Arrow Electronics, Inc. 1,335 1.0
26 27 Mellon Bank Corp. 1,304 1.0
27 31 Wells Fargo & Co. 1,300 1.0
28 35 Medtronic, Inc. 1,283 1.0
29 19 AMR Corp. 1,274 0.9
30 60 Telefonakteibolaget LM Ericsson, Class B, ADR 1,269 0.9
31 32 Merck & Co. Inc. 1,267 0.9
32 23 Dole Foods, Inc. 1,260 0.9
33 9 Transamerica Corp. 1,258 0.9
34 55 May Department Stores Co. 1,216 0.9
35 44 Triton Energy Corp. 1,208 0.9
36 25 Sprint Corp. 1,166 0.9
37 38 Champion International Corp. 1,147 0.9
38 48 Progressive Corp. 1,145 0.8
39 41 Caterpillar, Inc. 1,131 0.8
40 56 R.R. Donnelley & Sons Co. 1,129 0.8
41 40 PMI Group, Inc. 1,116 0.8
42 47 Nokia Corp. ADR 1,106 0.8
43 36 Freeport-McMoRan Copper & Gold, Inc., Class A 1,094 0.8
44 39 General Electric Co. 1,092 0.8
45 45 Gillette Co. 1,082 0.8
46 50 Amgen, Inc. 1,073 0.8
47 70 British Sky Broadcasting Group ADR 1,045 0.8
48 26 Motorola, Inc. 1,033 0.8
49 115 Zebra Technologies Corp., Class A 1,017 0.8
50 42 American International Group, Inc. 1,008 0.7
</TABLE>
*Formerly Varity Corp.--name changed due to merger with Lucas Industries PLC.
5
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
[photo]
JEFFREY J. MILLER
Provident Investment Counsel, Inc.
Manager Interview
Sustainable Earnings Growth: The Tailwind Behind Long-Term Outperformance
Liberty All-Star Growth Fund continues its series of portfolio manager
interviews.
Provident Investment Counsel, Inc. is one of the Fund's three portfolio
managers. Provident invests in mid to large capitalization companies with
fast growing earnings and bright prospects. Provident believes that companies
with quality financial characteristics and accelerating sales and profit
growth will provide superior stock returns. Stocks held typically have high
profit margins and return on equity and price/earnings ratios less than their
predicted growth rates. We recently had the opportunity to talk with Jeffrey
J. Miller, Provident's Managing Director. The Fund Manager, Liberty Asset
Management Company (LAMCO), serves as the moderator for the interview.
[boxed paragraph]
The views expressed in this interview represent the manager's views at the
time of the discussion and are subject to change.
LAMCO: Since this is your first interview for the Fund, perhaps a good place
to start would be a review of Provident's investment philosophy and style.
Miller: First and foremost we believe that active investment management adds
value, as opposed to passive index investing. Over the past two years, it has
been difficult to demonstrate that because of the very good performance by
the very large cap segment of the market place, which has driven the indexes
to the record highs that we've been seeing. However, we at Provident have
outperformed the indexes over time and I expect we'll continue to do so.
Our goal of achieving superior returns is built on our belief that over
time stock prices rise because the earnings of the underlying companies are
growing at a superior and sustainable rate. So, the first thing we're looking
for is companies that have very high and sustainable earnings growth rates.
If these earnings streams, in our opinion, are sustainable, then we can do a
lot of fundamental research, buy the most attractive companies and hold on to
them for a longer period of time. This is distinctly different from other
growth styles, for instance, the momentum substyle, which is more short-term
oriented. All- Star Growth Fund shareholders have not seen how long we've
held certain stocks because we're relatively new to the Fund, but we have
held some stocks for quite some time because they're still on that growth
path. That's what we're really looking for.
Additionally, we are trying to identify those companies with financial
characteristics --such as profit margins and return on equity--that are very
strong relative to market averages. That means there's a higher element of
quality associated with the companies that we're investing in. So, when you
get superior growth and superior quality, over longer periods of time you
should also get superior returns.
LAMCO: You mentioned fundamental research. Do you do your own research
in-house?
Miller: Yes, we have 14 analysts, all of whom are fundamentalists and
generalists. We will leverage our own efforts with outside research from a
wide range of sources, including national, regional and specialty firms. They
tend to be a supplement to our own efforts. As testimony to the amount of
fundamental research we put
6
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
[callout]
..............................................................................
"Our goal of achieving superior returns is built on our belief that over time
stock prices rise because the earnings of the underlying companies are
growing at a superior and sustainable rate."
..............................................................................
into the process, in 1995 we had 419 different management teams visit us in
our offices and 328 analysts from various firms. That doesn't even count all
those occasions when we went out and visited with managements at their site.
In the first half of this year, we had 302 managements and 194 analysts in to
visit with us.
It's worth pointing out that we seek many of the same things in an
investment that other growth stock investors seek. It's analogous to house-
hunting. You're looking for a home and you know what you want: three
bedrooms, two-car garage, etc. It's easy to find homes like that, but only
after you've seen a number of homes with those characteristics are you able
to determine the best buy among them.
LAMCO: How about the investment environment this year with regard to your
style. How have you done?
Miller: We couldn't be happier with the way it's starting to play out. In the
four years ending in 1995, we saw environments of continued economic growth,
which certainly helped companies that have a greater economic orientation.
Those companies tend to be a little more cyclical, so they don't fit the
characteristics we're looking for, but they were showing strong earnings
gains. Where we tend to really shine is in a slowing economic environment.
Why? Those are the times when companies that have high and consistent rates
of growth excel. Their sales and earnings can withstand slower economic
periods. What we're seeing this year is a style rotation where the growth
style has become the market leader.
We like to look at top line sales growth as well as bottom line earnings.
We did an analysis of the 20 largest capitalization stocks in the S&P 500
Index. On average, they had 9 percent sales growth and 11 percent earnings
growth. Our portfolio is showing 30 percent top line sales growth and 30
percent bottom line earnings growth.
LAMCO: What types of stocks among your holdings seem to have benefited the
most from these conditions?
Miller: We have done well in areas that are heavily weighted in the
portfolio, including technology and technology services (software). That has
been an area of strong performance for us, and there I'm talking about
companies such as Oracle, Computer Associates and Microsoft. We're also
overweighted in the financial services sector. Certainly, declining interest
rates have helped, but we have always tried to identify companies that aren't
interest rate sensitive because we can't control where interest rates are
going. That would include credit card companies such MBNA and First USA.
Consumer services and healthcare are also strong areas. A stock in the
consumer services area would be British Sky Broadcasting, and in healthcare
it would be Boston Scientific.
LAMCO: What's your outlook for a continuation of the current leadership by
growth stocks?
Miller: We remain optimistic because of the underlying fundamentals of the
companies in the portfolio. We've done some work internally in which we've
looked at the relationship between inflation and price/earning ratios, and
over time it has consistently been an inverse one. Higher inflation leads to
lower price/ earnings ratios and vice versa. We've certainly seen lower rates
of inflation in this environment, around the 3 percent
Continued on page 8
7
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Continued from page 7
level, but I think the more compelling fact is that we've seen stable rates
of inflation for the last 4-1/2 years. We haven't seen that kind of stability
in inflation since the early 1960s. That was an environment where P/Es traded
at above-average levels historically--and they just stayed there. We're not
making a case that P/Es have to go higher, but we do believe, that if P/Es
continue to go sideways, the only way you're going to get better returns is
from better earnings growth. That causes us to be optimistic because we know
we're getting earnings growth from our companies.
LAMCO: Earlier you mentioned some companies in the portfolio. Would you give
us a little more detail on two or three recent acquisitions?
Miller: One is Safeway, the grocery chain. What's so exciting about the
grocery business? We believe it's a consolidating industry in which Safeway
is gaining market share. We also feel that Safeway has one of the best
managements in the industry. They're very shareholder focused in terms of
doing the things that are necessary to increase the profits of the company,
which will increase the price of the stock. There's also an opportunity here
for some margin expansion through better category management and private
labeling. Margins are already about twice the industry average. Once again,
if the economy slows down, we don't think it will effect their business.
Another recent acquisition is AES Corp. AES is one of the largest
independent power producers in the world; it currently owns or operates six
electric generating facilities in the U.S. and five overseas. There's a huge
move internationally toward privatization of power producing plants. We think
that this may allow AES to triple its capacity over the next five years,
enabling the company to deliver annual earnings growth in excess of 25
percent. Once again, there's a great management team and management owns
about 40 percent of the stock. We like it when investors' interests are
aligned with management's because we know that's where their incentive is.
Another recent acquisition with a slightly different theme to it is SunGard
Data Systems. SunGard is a computer services company providing investment
support systems and disaster recovery systems. It's a beneficiary of the
trend toward outsourcing computer services. We have some other stocks in the
portfolio that are also beneficiaries of that trend. It's a real one and we
think SunGuard is ideally situated to benefit from it. We see the company
delivering about 12 percent internal growth annually, plus they've had a
history of making smart acquisitions. There's also a very high recurring
revenue stream for the company --about 85 percent of revenues are recurring
in nature, and we like that, too.
LAMCO: You referred to longer-term holdings earlier. How about discussing a
few of them.
Miller: One of our longer-term holdings is HFS, Inc., or Hospitality
Franchise Systems. HFS is the largest hotel franchiser in the country, with
names like Days Inn, Howard Johnson and Ramada. It continues to expand in
other areas, for instance in car rental by acquiring Avis franchises, and
they're in discussions with Alamo Rental Car. HFS takes these brand names
[callout]
..............................................................................
"Where we tend to really shine is in a slowing economic enivronment. Why?
Those are the times when companies that have high and consistent rates of
growth excel."
..............................................................................
8
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
[callout]
..............................................................................
". . . we do believe that if price/earnings ratios continue to go sideways,
the only way you're going to get better returns is from better earnings
growth. That causes us to be optimistic because we know we're getting
earnings growth from our companies."
..............................................................................
and cross-markets into other services, linking up, for instance, with
programs with companies like Disney. It is also in the real estate business
through Century 21 and Coldwell Banker franchise agreements. Recently, HFS
announced the acquisition of RCI, the largest player in the time share
industry. But HFS doesn't own the underlying assets, it just acquires rights
to the name.
We think that HFS management is top notch, led by Henry Silverman. A number
of articles have been written recently about what he's doing with this
company. He certainly has a track record of under promising and over
delivering. The earnings growth is about 35 percent. HFS is very innovative
in its franchising strategy, generating revenue streams from franchise
royalties as well as securing preferred vendor arrangements without the
ownership of the underlying assets, thereby reducing risk.
A less complicated company and one that's known to everyone is Gillette. It
possesses a highly visible earnings stream with very little economic
sensitivity. So, we're not concerned if the economy slows insofar as this
company is concerned. Gillette is also growing overseas, recently acquiring a
Russian blade manufacturer in a market that is vastly underpenetrated. Even
more recently, Gillette acquired Duracell. We think this will accelerate its
earnings by a couple of percentage points. Here again, Gillette is in a very
simple, basic and recurring business, regardless of what direction the
economy goes.
LAMCO: How about your ability to find attractive stocks in today's market?
Miller: We're able to because these lower levels of inflation act like a
discounting mechanism. The higher inflation is, the shorter the vision of
investing. In other words, the orientation is to near-term earnings, but with
inflation remaining low there's a willingness to look to the future and at
what some of these companies are doing to position themselves for consistent,
long-term earnings gains. We look at the market in terms of what we pay for a
stock, measured by its P/E ratio relative to its earnings growth rate. Our
portfolio is at about a 15 percent discount to its growth rate, whereas the
S&P 500 Index is probably trading about an 80 percent premium to its growth
rate.
LAMCO: Perhaps you could discuss your sell discipline and then give us a
couple of examples of how it has played out.
Miller: For most managers, selling is the toughest thing because when you're
buying a stock you do your fundamental
Continued on page 10
[callout]
..............................................................................
"We've certainly seen lower rates of inflation in this environment . . . but
I think the more compelling fact is that we've seen stable rates of inflation
for the last 4-1/2 years."
..............................................................................
9
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Continued from page 9
research, make your checks and then you either say I like the idea or I don't
like the idea. And if you don't like the idea you go on to another one. The
problem with selling is, that you've already said you like the idea and at
some point you have to change your mind.
In our research meetings, we have a list of factors that we look at to
promote the questioning of everything we have on the buy list. We break down
reasons to sell into two broad areas, quantitative and qualitative. In the
quantitative area, what we're looking at are valuation measures, such as the
P/E ratio relative to the company's growth rate. We set a price that targets
the kind of return we should get out of this company. It's dynamic in that
with each quarterly earnings report that a company delivers, we go out
another quarter. But if the stock has had a rapid run-up and we think we've
captured the essence of what we had hoped for, we'll sell it and go on to
something else. Once a week we question the bottom 10 percent of all the
stocks in our portfolio because no matter how well you're doing, the bottom
10 percent isn't helping you relative to the average. And every stock that
has a decline of 15 percent or more from a recent high or purchase price is
reviewed. On the qualitative side, we look at the fundamentals--the thesis of
why we bought the stock. We're always interested in "bear stories," or
anything of a negative nature about any of the stocks that we own.
An example is Cabletron, a successful stock for us. It is in the networking
business, which is a very exciting area. However, we sold the stock because
it had hit a price target, and when that happens we ask our analysts to
convince us why we should continue to hold the stock. That analysis resulted
in a check and a feeling that there was increased competition from what was
actually another portfolio holding of ours, Cisco Systems. That raised some
questions in our mind about the company's ability to continue to deliver the
kinds of earnings that Wall Street was used to seeing from this company. We
sold it in May at around 79 and it subequently went down to 53, although it
has rebounded somewhat.
Another example is United Healthcare, also a long-term holdings of ours.
United was acquiring a company called Metra Health and the integration of
this new company seemed to be proving more difficult than United had
expected. It was also getting into a more competitive pricing environment. We
felt earnings would come under pressure and that caused us to sell. It's
always a tough decision, especially for a long term holder, but you've got to
do it.
LAMCO: How about the month of July? It was a difficult month for all
investors, especially for those in the high tech area.
Miller: It was a tough month. However, it was a good but volatile quarter
overall. I characterize the three months in the quarter this way: July was
the month of fear . . . of the negative earnings report. Then, the market
refocused on the fundamentals, making August the reality month. As more and
more companies reported earnings, it wasn't as bad as people were fearing.
Then, I would characterize the month of September as being one of hope . . .
hope that this economy can slow without the Federal Reserve raising rates.
This produced a rally and a very strong September. So, in one quarter you saw
the whole history of the stock market: fear, reality and hope. [star]
[callout]
..............................................................................
" . . . selling is the toughest thing because when you're buying a
stock . . . you either say I like the idea or I don't like the idea.
. . . The problem with selling is that you've already said you like the idea
and at some point you have to change your mind."
..............................................................................
10
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Schedule of Investments as of September 30, 1996
(Unaudited)
Shares Market Value
Aerospace (2.2%)
Lockheed Martin Corp. 15,000 $ 1,351,875
McDonnell Douglas Corp. 30,000 1,575,000
-------------
2,926,875
-------------
Auto, Tires & Accessories (2.0%)
AutoZone, Inc. (a) 16,000 464,000
Discount Auto Parts, Inc. (a) 24,000 612,000
LucasVarity Corp. (a) 42,000 1,653,750
2,729,750
-------------
Banks (6.1%)
Charter One Financial, Inc. 23,100 924,000
Citicorp 20,000 1,812,500
Crestar Financial Corp. 12,000 708,000
First Financial Corp. 5,000 120,000
Mellon Bank Corp. 22,000 1,303,500
Signet Banking Corp. 24,000 642,000
Standard Federal Bancorporation 13,800 631,350
Union Planters Corp. 22,500 798,750
Wells Fargo & Co. 5,000 1,300,000
-------------
8,240,100
-------------
Broadcasting & Cable (1.0%)
British Sky Broadcasting Group
ADR 19,000 1,045,000
Paxson Communications Corp. (a) 24,000 270,000
-------------
1,315,000
-------------
Business Services (2.6%)
AccuStaff, Inc. (a) 18,000 465,750
Electronic Data Systems Corp. 12,000 736,500
First Data Corp. 23,185 1,892,475
Interim Services, Inc. (a) 11,000 470,250
-------------
3,564,975
-------------
Chemicals (3.4%)
Cytec Industries, Inc. (a) 14,500 563,688
Hanna (M.A.) Co. 36,000 819,000
Hercules, Inc. 25,000 1,368,750
Monsanto Co. 50,000 1,825,000
-------------
4,576,438
-------------
Computer & Business Equipment
(12.5%)
Active Voice Corp. (a) 20,000 220,000
Adaptec, Inc. (a) 16,000 960,000
Ceridian Corp. (a) 9,000 450,000
Cisco Systems, Inc. (a) 22,000 1,365,375
Computer Associates
International, Inc. 30,000 1,792,500
Computer Sciences Corp. (a) 10,000 768,750
Danka Business Systems ADR 10,000 397,500
Intel Corp. 18,000 1,717,875
Komag, Inc. (a) 18,372 393,372
Microchip Technology (a) 7,300 272,838
Microsoft Corp. (a) 20,000 2,637,500
Norand (a) 22,400 408,800
Nu-Kote Holdings, Inc. (a) 42,000 456,750
Oracle Corp. (a) 38,100 1,621,631
Quantum Corp. (a) 36,000 632,250
SunGard Data Systems, Inc. (a) 31,200 1,404,000
The Peak Technologies Group (a) 15,000 326,250
Computer & Business Equipment
(continued)
Zebra Technologies Corp., Class
A (a) 39,700 $ 1,017,311
-------------
16,842,702
-------------
Construction (0.4%)
J. Ray McDermott, S.A. (a) 20,000 582,500
-------------
Consumer Products (1.4%)
Department 56, Inc. (a) 22,000 547,250
Gucci Group NV ADR 10,000 725,000
Tommy Hilfiger Corp. (a) 10,000 592,500
-------------
1,864,750
-------------
Cosmetics & Toiletries (0.8%)
Gillette Co. 15,000 1,081,875
-------------
Diversified (2.1%)
Ball Corp. 16,000 392,000
General Electric Co. 12,000 1,092,000
Lydall, Inc. (a) 23,000 560,624
Modine Manufacturing Co. 30,000 787,500
-------------
2,832,124
-------------
Drugs & Health Care (13.1%)
Allergan, Inc. 22,500 857,812
Amgen, Inc. (a) 17,000 1,073,125
Bard (C.R.) Inc. 18,000 560,250
Beverly Enterprises, Inc. (a) 50,000 543,750
Boston Scientific Corp. (a) 13,000 747,500
Cardinal Health, Inc. 10,000 826,250
Columbia/HCA Healthcare Corp. 11,000 625,625
Dentsply International, Inc. 13,000 578,500
Elan Corp. ADR (a) 16,000 478,000
Emeritus Corp. (a) 13,000 204,750
Fisher Scientific International 23,500 969,375
HEALTHSOUTH Corp. (a) 24,000 921,000
Horizon Healthcare (a) 40,000 480,000
Living Centers of America, Inc.
(a) 18,500 462,500
Medtronic, Inc. 20,000 1,282,500
Merck & Co., Inc. 18,000 1,266,750
Millipore Corp. 13,500 533,250
Orthologic Corp. (a) 19,000 201,875
Oxford Health Plans, Inc. (a) 18,000 895,500
Pfizer, Inc. 25,000 1,978,125
Research Medical, Inc. (a) 25,000 434,375
R.P. Scherer Corp. (a) 17,700 862,875
Sterling House Corp. (a) 12,000 196,500
Sun Healthcare Group, Inc. (a) 57,600 748,800
-------------
17,728,987
-------------
Electrical Utilities (0.4%)
AES Corp. (a) 12,000 472,500
-------------
Electronics & Electrical
Equipment (2.4%)
Analog Devices, Inc. (a) 15,000 406,875
Arrow Electronics, Inc. (a) 30,000 1,335,000
Hubbell, Inc., Class B 24,000 888,000
Tyco International Ltd. 15,000 646,875
-------------
3,276,750
-------------
11
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Schedule of Investments (continued)
Common Stocks--continued
Shares Market Value
Financial Services (12.4%)
Advanta Corp., Class B 19,000 $ 812,250
Capital One Financial Corp. 25,000 750,000
Cityscape Financial Corp. (a) 23,400 620,100
CMAC Investment Corp. 7,500 476,250
Countrywide Credit Industries,
Inc. 55,000 1,409,375
Credit Acceptance Corp. (a) 11,200 308,000
CUC International, Inc. (a) 14,000 558,250
Federal Home Loan Mortgage Corp. 24,000 2,349,000
Federal National Mortgage Assoc. 60,000 2,092,500
Finova Group, Inc. 12,000 720,000
First USA, Inc. 14,000 775,250
MBNA Corp. 42,000 1,459,500
Morgan Stanley Group, Inc. 27,000 1,343,250
Paychex, Inc. 10,000 580,000
Southern Pacific Funding Corp.
(a) 17,000 429,250
Travelers Group, Inc. 30,000 1,473,750
United Companies Financial Corp. 15,500 513,438
-------------
16,670,163
-------------
Food & Beverage (3.5%)
Canandaigua Wine Co., Class A
(a) 27,216 564,732
Dole Foods, Inc. 30,000 1,260,000
Flowers Industries, Inc. 32,000 652,000
Hormel Foods Corp. 29,000 677,875
IBP, Inc. 30,000 697,500
Performance Food Group Co. (a) 25,500 420,750
Robert Mondavi Corp. (a) 14,500 474,875
-------------
4,747,732
-------------
Hotels & Leisure (1.4%)
HFS, Inc. (a) 20,000 1,337,500
Mirage Resorts, Inc. (a) 24,000 615,000
-------------
1,952,500
-------------
Industrial Equipment (0.8%)
Caterpillar, Inc. 15,000 1,130,625
-------------
Insurance (7.6%)
ACE, Ltd. 30,000 1,586,250
AFLAC, Inc. 40,000 1,420,000
American International Group,
Inc. 10,000 1,007,500
EXEL Limited 40,000 1,390,000
MGIC Investment Corp. 13,000 875,875
NAC Re Corp. 11,000 396,000
PMI Group, Inc. 21,000 1,115,625
Progressive Corp. 20,000 1,145,000
Transamerica Corp. 18,000 1,257,750
-------------
10,194,000
-------------
Metals & Mining (0.8%)
Freeport-McMoRan Copper & Gold,
Inc., Class A 35,000 1,093,750
-------------
Oil & Gas (3.8%)
Enron Corp. 11,000 $ 448,250
Murphy Oil Corp. 9,000 434,250
Tejas Gas Corp. (a) 10,700 389,213
Tenneco, Inc. 20,000 1,002,500
Tosco Corp. 5,000 384,125
Triton Energy Corp. (a) 27,000 1,208,250
Union Texas Petroleum Holdings,
Inc. 36,000 778,500
Weatherford Enterra, Inc. (a) 17,538 480,103
-------------
5,125,191
-------------
Paper (0.9%)
Champion International Corp. 25,000 1,146,875
-------------
Pollution Control (0.5%)
Republic Industries, Inc. (a) 25,000 725,000
-------------
Publishing (0.8%)
R.R. Donnelley & Sons Co. 35,000 1,128,750
-------------
Retail Trade (3.2%)
May Department Stores Co. 25,000 1,215,625
Michaels Stores, Inc. (a) 42,000 616,875
Micro Warehouse, Inc. (a) 25,458 655,544
Safeway, Inc. (a) 18,000 767,250
Staples, Inc. (a) 30,000 665,625
Tuesday Morning Corp. 23,000 422,625
-------------
4,343,544
-------------
Services (0.8%)
Service Corp. International 18,000 544,500
Unitog Co. 18,000 544,500
-------------
1,089,000
-------------
Telecommunication (5.6%)
Arch Communications Group, Inc.
(a) 33,000 451,688
Asia Satellite
Telecommunications Holding Ltd.
ADR (a) 12,000 322,500
Colonial Data Technologies Corp.
(a) 26,000 295,750
Mobile Telecommunication
Technologies Corp. (a) 60,000 945,000
Motorola, Inc. 20,000 1,032,500
Nokia Corp. ADR 25,000 1,106,250
Sprint Corp. 30,000 1,166,250
Telefonakteibolaget LM Ericsson,
Class B, ADR 50,000 1,268,750
U.S. Order, Inc. (a) 24,500 290,938
WorldCom, Inc. (a) 24,000 513,000
-------------
7,392,626
-------------
Transportation (2.2%)
American Freightways Corp. (a) 37,825 335,697
AMR Corp. (a) 16,000 1,274,000
Hvide Marine, Inc. (a) 23,000 299,000
Tidewater, Inc. 10,000 373,750
U.S. Freightways Corp. 35,000 717,500
-------------
2,999,947
-------------
Total Common Stocks (Cost
$109,587,306) $127,775,029
-------------
12
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
<TABLE>
<CAPTION>
Interest Maturity Par Market
Short-term Investment (5.5%) Rate Date Value Value
------------------------------- -------------------- ------------- --------------
<S> <C> <C> <C> <C>
Commercial Paper (0.7%)
American Express Credit Corp. 5.29% 11/12/96 $1,000,000 $1,000,000
--------------
</TABLE>
<TABLE>
<S> <C>
Repurchase Agreement (4.8%)
Bankers Trust Securities Corp. dated 09/30/96, 5.40% to be
repurchased at $6,441,287 on 10/01/96, collateralized by U.S.
Treasury notes with various maturities to 2019, with a current
market value of $6,597,263 6,440,000
---------------
Total Short-term Investments (Cost $7,440,000) 7,440,000
---------------
Total Investments (100.2%) (Cost $117,027,306)(b) 135,215,029
Other Assets and Liabilities, Net (-0.2%) (333,356)
---------------
Net Assets (100.0%) $134,881,673
===============
Net Asset Value Per Share (11,339,096 shares outstanding) $11.90
===============
Notes to Schedule of Investments:
(a) Non-income producing security.
(b)Gross unrealized appreciation and depreciation of investments
at September 30, 1996 is as follows:
Gross unrealized appreciation $ 23,077,453
Gross unrealized depreciation (4,889,730)
---------------
Net unrealized appreciation $ 18,187,723
===============
</TABLE>
Acronym Name
ADR American Depository Receipt
13
<PAGE>
LIBERTY ALL[star]STAR GROWTH FUND, INC.
Per Share
Changes in
Net Assets
<TABLE>
<CAPTION>
Nine months
ended Year ended December 31,
September 30, 1996 -----------------------------------------------
(Unaudited) 1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.55 $ 9.95 $10.54 $10.28 $10.40 $ 9.90
------------------- -------- -------- -------- -----------------
Net investment income 0.01 0.31 0.23 0.18 0.29 0.44
Dividends declared - (0.76) (0.58) (0.48) (0.44) (0.65)
Net realized and unrealized gain (loss)
on investments 1.34 1.05 (0.24) 0.56 0.03 0.71
------------------- -------- -------- -------- -----------------
Net asset value at the end of period $11.90 $10.55 $ 9.95 $10.54 $10.28 $10.40
=================== ======== ======== ======== =================
</TABLE>
14
<PAGE>
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