[front cover]
[magnified circle of stock market report]
FIRST
QUARTER
REPORT
1998
[Liberty All*Star logo] LIBERTY
ALL*STAR
--------
GROWTH FUND
<PAGE>
CHAIRMAN'S LETTER
................................................................................
To Our Fellow Shareholders: May 1998
The net asset value (NAV) of a common share of the Fund rose from $12.89 on
December 31, 1997, to $14.36 on March 31, 1998, after deducting the distribution
of 35 cents declared during the quarter. The market price of a share of the Fund
traded in a range from $11.625 to $13.938 before closing the quarter at $13.50.
The ending price represented a discount to NAV of 6.0 percent compared with a
discount to NAV of 7.4 percent on December 31, 1997. Key investment results and
comparisons are noted below.
As the table shows, during the first quarter the Fund's net asset value
increased 14.2 percent, which compares with an increase of 12.8 percent for the
Lipper Growth Mutual Fund Average (the Fund's primary benchmark) and an increase
of 16.9 percent for the NASDAQ Composite. For the last 12 months, the Fund's net
asset value was up 47.1 percent compared with 42.9 percent for the Lipper Growth
Mutual Fund Average and 50.3 percent for the NASDAQ Composite.
The S&P 500 continued its advance for an unprecedented 13th quarter in a
row, ending the quarter at 1101.75 after reaching a new high of 1105.65 on March
24. Market leadership shifted from value to growth stocks and remained with the
larger capitalization companies. Smaller capitalization stocks have
under-performed since last summer, when the Asian financial crisis triggered a
flight-to-quality mentality. Our multi-management investment approach gives your
fund representation across the market capitalization spectrum, thereby dampening
these quarter-to-quarter gyrations in leadership. Mr. Christensen, in his
President's letter, elaborates further on the divergence in returns between
small and large capitalization growth stocks.
I would like to welcome a new director to the board, John J. Neuhauser, who
was elected by shareholders at their recent meeting. All other directors
continue in office and all other proposals placed before the meeting were also
approved.
Sincerely,
/s/ Harold W. Cogger
Harold W. Cogger
Chairman of the Board of Directors
Liberty All-Star Growth Fund, Inc.
Executive Vice President
Liberty Financial Companies, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First Quarter Latest 12 Months
- --------------------------------------------------------------------------------
<S> <C> <C>
LIBERTY ALL-STAR GROWTH FUND, INC.
Shares Valued at Net Asset Value 14.2% 47.1%
Shares Valued at Market Price
With Dividends Reinvested 16.0% 49.6%
Fund's Closing Price Range $13.938 to $11.688 $13.938 to $9.625
Fund's Discount Range 8.1% to 0.3% 12.7% to 0.3%
Lipper Growth Mutual Fund Average 12.8% 42.9%
S&P 500 Stock Index 14.0% 48.0%
Dow Jones Industrial Average 11.7% 36.0%
NASDAQ Composite Index 16.9% 50.3%
</TABLE>
Figures shown for the Fund and the Lipper Growth Mutual Fund Average are total
returns, which include income, after deduction of fees and other operating
expenses. Figures shown for the unmanaged S&P 500 Stock Index and the Dow Jones
Industrial Average are total returns including income. Figures for the unmanaged
NASDAQ Index are total returns excluding income.
- --------------------------------------------------------------------------------
1
<PAGE>
PRESIDENT'S LETTER
...............................................................................
To Our Fellow Shareholders: May 1998
Growth stocks rebounded from their weak relative performance during the
fourth quarter of last year, but, as has typically been the case for the past
couple of years, the larger growth stocks turned in the best results.
Interesting, however, is how the performance advantage of large growth stocks
narrowed during the last quarter, as the chart below illustrates. It appears
that, for the time being, the negative sentiment created by the Asian financial
crisis, which drove small growth stocks sharply lower in the fourth quarter, has
generally dissipated. The speed and magnitude in which events are discounted in
today's market environment make it even more difficult to anticipate which
investment style or strategy will be in favor. The chart also illustrates how
sharply the quarterly return patterns have differed for large and small
capitalization growth stocks (as represented by the Russell 1000 and 2000
indices, respectively) during the past year. LAMCO's multi-managed investment
approach mitigates the fluctuations in returns associated with random shifts in
leadership by blending three complementary investment styles which cover the
market capitalization spectrum.
More than 61% of the Fund's shareholders elected to take newly issued
shares, valued at the closing market price of $13.625 on April 3, 1998, in the
recent first quarter distribution. By taking newly issued shares, rather than
cash, shareholders are able to reinvest their capital gains in the Fund so they
can build additional value through compounding.
William Blair & Company is the subject of the manager interview beginning
on page 6. John Jostrand, Principal, discusses the firm's investment philosophy
and decision making process as well as particular stocks that are representative
of the firm's style of investing.
The Board of Directors has authorized and set the terms of an offering to
its shareholders of rights to purchase additional shares of the Fund.
Shareholders will be issued non-transferable rights entitling them to subscribe
for one additional share for every 10 shares held, with the right to subscribe
for additional shares not subscribed for by others in the primary subscription.
The subscription price will be 95 percent of the lower of the closing market
price or net asset value on the business day following the expiration of the
subscription period.
The rights offering is subject to the effectiveness of the Fund's
registration statement to be filed with the Securities and Exchange Commission
and will be made only by means of a prospectus to be mailed to shareholders.
Subject to effectiveness of the registration statement, it is anticipated that
the offering will commence in June, 1998, and will continue for approximately 30
days.
Thank you for your continuing support of the Fund.
Sincerely,
/s/ Richard R. Christensen
Richard R. Christensen
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc. and
Liberty Asset Management Company
[typeset representation of bar chart]
<TABLE>
<CAPTION>
RUSSELL 1000 GROWTH VS RUSSELL 2000 GROWTH
- --------------------------------------------------------------------------------
Large Outperformed Small
<S> <C>
2Q97 1.4%
3Q97 -9.4%
4Q97 9.7%
1Q98 3.3%
Small Outperformed Large
- --------------------------------------------------------------------------------
</TABLE>
[end bar chart]
2
<PAGE>
PORTFOLIO MANAGERS / PORTFOLIO CHARACTERISTICS
................................................................................
THE FUND'S THREE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE
ARE:
MISSISSIPPI VALLEY ADVISORS INC. (MVA)
Small capitalization growth companies that sell at a reasonable current price
relative to their projected one and three year growth rates.
WILLIAM BLAIR & COMPANY
Companies with high profitability and enduring growth across a broad range of
market capitalizations.
OPPENHEIMER CAPITAL
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital.
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 a different Investment Style. The shaded column
highlights the characteristics of the Fund as a whole, while the first column
shows portfolio characteristics for the S&P SmallCap 600 Index (a representative
index of small capitalization companies), and the final column shows portfolio
characteristics for the S&P 500 Stock Index (a representative index of large
capitalization companies).
PORTFOLIO CHARACTERISTICS AS OF MARCH 31, 1998
(UNAUDITED)
MARKET CAPITALIZATION SPECTRUM
SMALL LARGE
[screened band going from light to dark]
<TABLE>
<CAPTION>
S&P
Small Cap William Oppen- Total S&P
600 Index MVA Blair heimer Fund 500 Index
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of Holdings 600 78 50 31 154 500
Weighted Average Market
Capitalization (billions) $1.1 $1.6 $23 $32 $19.2 $64
Percent of Holdings in S&P 500 -- 6% 59% 72% 46% --
Average Five-Year Earnings
Per Share Growth -- 22% 26% 20% 23% 17%
Dividend Yield 0.7% 0.5% 0.4% 1.1% 0.7% 1.4%
Average Price/Earnings Ratio 21x 20x 33x 19x 24x 25x
Average Price/Book Value Ratio 2.9x 3.9x 6.5x 3.8x 4.8x 4.6x
</TABLE>
3
<PAGE>
TOP 50 HOLDINGS
................................................................................
<TABLE>
<CAPTION>
RANK RANK MARKET
AS OF AS OF VALUE) PERCENT OF
3/31/98 12/31/97 SECURITY NAME ($000) NET ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 1 Federal Home Loan Mortgage Corp. $4,412 2.4%
2 2 Automatic Data Processing, Inc. 3,158 1.7
3 5 EXEL Limited 3,100 1.7
4 8 Morgan Stanley, Dean Witter, Discover & Co. 3,006 1.6
5 3 Travelers Group, Inc. 3,000 1.6
6 11 Countrywide Credit Industries, Inc. 2,925 1.6
7 4 Intel Corp. 2,886 1.6
8 6 Citicorp 2,840 1.5
9 9 ACE Limited 2,827 1.5
10 46 R.R. Donnelley & Sons Co. 2,727 1.5
11 25 Nokia Corp. ADR 2,698 1.5
12 7 Minerals Technologies, Inc. 2,453 1.3
13 10 Progressive Corp. 2,424 1.3
14 14 Sprint Corp. 2,373 1.3
15 12 Viking Office Products, Inc. 2,365 1.3
16 13 AMRCorp. 2,291 1.2
17 21 AFLAC,Inc. 2,214 1.2
18 20 State Street Corp. 2,144 1.2
19 17 Transamerica Corp. 2,097 1.1
20 23 MBNA Corp. 2,048 1.1
21 18 Boeing Co. 2,033 1.1
22 26 Caterpillar, Inc. 1,982 1.1
23 29 American International Group, Inc. 1,889 1.0
24 28 Home Depot, Inc. 1,882 1.0
25 15 Household International, Inc. 1,873 1.0
26 31 LucasVarity PLC ADR 1,859 1.0
27 33 Shared Medical Systems Corp. 1,842 1.0
28 24 HEALTHSOUTH Corp. 1,790 1.0
29 41 Staples, Inc. 1,774 1.0
30 22 Molex, Inc. 1,727 0.9
31 38 General Electric Co. 1,721 0.9
32 60 Acxiom Corp. 1,714 0.9
33 35 Lockheed Martin Corp. 1,688 0.9
34 27 Wells Fargo & Co. 1,656 0.9
35 40 Cendant Corp. 1,652 0.9
36 34 Illinois Tool Works, Inc. 1,625 0.9
37 16 Arrow Electronics, Inc. 1,624 0.9
38 44 Airtouch Communications, Inc. 1,615 0.9
39 19 Pfizer, Inc. 1,595 0.9
40 45 May Department Stores Co. 1,588 0.9
41 48 Monsanto Co. 1,560 0.8
42 50 Cognizant Corp. 1,555 0.8
43 32 Microsoft Corp. 1,538 0.8
44 47 CVS Corp. 1,525 0.8
45 36 Gartner Group, Inc., Class A 1,480 0.8
46 107 Money Store, Inc. (The) 1,463 0.8
47 43 Dole Food Co. 1,451 0.8
48 58 Zebra Technologies Corp., Class A 1,451 0.8
49 52 Network General Corp. 1,447 0.8
50 39 Medtronic, Inc. 1,427 0.8
</TABLE>
4
<PAGE>
MAJOR STOCK CHANGES IN THE FIRST QUARTER
................................................................................
The following are the major ($500,000 or more) stock changes -- both additions
and reductions -- that were made in the Fund's portfolio during the first
quarter of 1998.
<TABLE>
<CAPTION>
SHARES
--------------------------------------
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 3/31/98
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADC Telecommunications, Inc. 24,100 24,100
Alternative Resources Corp. 28,100 28,100
Aspen Technology, Inc. 17,500 17,500
General Scanning, Inc. 34,000 34,000
IRI International Corp. 53,000 53,000
Mattel, Inc. 17,000 17,000
Maxxim Medical, Inc. 28,000 28,000
Photronics, Inc. 25,000 25,000
PRI Automation, Inc. 22,000 22,000
R.R. Donnelley & Sons Co. 31,400 66,400
Shire Pharmaceuticals ADR 31,184 31,184
Sovereign Bancorp, Inc. 42,000 42,000
The Sports Authority, Inc. 49,000 49,000
Boston Scientific Corp. (11,500) 1,500
Charter One Financial, Inc. (11,500) 0
Computer Associates International, Inc. (10,750) 0
First Data Corp. (16,600) 38,470
Furniture Brands International, Inc. (23,000) 0
IXC Communications, Inc. (12,300) 20,700
Mobile Telecommunication Technologies Corp. (29,200) 20,746
Pfizer, Inc. (8,800) 16,000
PMI Group, Inc. (10,000) 0
Reuters Holdings PLC ADR (17,200) 0
Revlon, Inc. (17,200) 0
Samsonite Corp. (24,400) 0
Triton Energy Corp. (21,400) 5,600
U.S. Freightways Corp. (18,400) 26,900
</TABLE>
5
<PAGE>
MANAGER INTERVIEW
................................................................................
[photo of John F. Jostrand]
JOHN F. JOSTRAND
William Blair & Company
Manager Interview: Management is the Key Factor Behind Companies That Can
Generate Consistently Good Growth Rates. The Key to Finding Those
Companies is Old-Fashioned Field Research.
William Blair & Company is one of All-Star Growth Fund's three portfolio
managers. Chicago-based William Blair is a growth style manager emphasizing
disciplined, fundamental research to identify quality growth companies with
the ability to sustain their growth over long time periods. At the core of
the firm is a group of analysts that leads research aimed at identifying
companies that have the opportunity to grow in a sustainable fashion for
extended periods of time. In the first quarter report a year ago,
shareholders were introduced to Portfolio Manager John F. Jostrand, as
William Blair had been retained during the first quarter of 1997. Recently,
we had the opportunity to visit once again with Mr. Jostrand.
- --------------------------------------------------------------------------------
The views expressed in this interview represent the manager's views at the
time of the discussion and are subject to change.
- --------------------------------------------------------------------------------
LAMCO: Perhaps we can begin with a review of some of the broad factors that
distinguish William Blair & Company, including your investment philosophy,
objectives and style, as well as investment approach and process.
JOSTRAND: William Blair has been in the investment business for over 60 years
and throughout that period we have followed the same basic tenets, which are to
research and invest client funds in what we call quality growth stocks. To us,
quality means sustainable growth. Our process is based on solid, fundamental,
bottom-up company research.
The way in which we separate and identify quality growth stocks is by
employing an outstanding group of analysts who do extensive, old-fashioned field
work to research companies and industries. They review company financial
statements; interview company managements, customers and competitors; review
market share trends and other industry data; and evaluate the product or service
advantages that companies offer their customers. Based on this information, the
analysts establish financial projections that are the basis for stock purchases.
So far, this is not unlike the approach followed by many other investment
firms. But, there are a few things that differentiate William Blair. The first
would be the number of analysts on the staff, more than 30 of them and growing.
We continue to invest extensively in that part of our business. And,
importantly, relative to the $9 billion in assets that our firm manages, the
ratio of analysts to assets is quite high. In addition, our analysts are
uniformly focused on the same philosophy of quality, sustainable growth. They
also spend their time on a fairly limited number of stocks. In some investment
firms, analysts cut across a wide range of different industries and all the
various stocks within those industries. Our analysts tend to focus on a limited
number of stocks in order to know them very well.
LAMCO: Will an analyst stay within a single industry?
JOSTRAND: We give them a fair amount of latitude, but we do like them to stay
within a particular economic sector. For example, we may define a sector as
"business services" rather than just "industrial distribution," which might be a
little too narrow.
The reason is that we want the analysts to have enough commonality among
the companies or customers they cover to leverage their contacts and expertise.
But, we also want them to find the best companies, which means that once they
get beyond the top two or three players in an industry they're probably wasting
their time. So, we give them a fair amount of autonomy, and it has worked well
for a long time.
LAMCO: You have said in the past that the analysts take more of a qualitative
approach than a quantitatively-driven one.
JOSTRAND: Very much so. You could describe our growth stock philosophy as going
after "a slice of growth," not just any growth stock. In other words, we are
after the highest quality, most consistent growth stocks. That drives our
qualitative approach. If we simply ran a computer screen on all companies
6
<PAGE>
MANAGER INTERVIEW
................................................................................
that have grown earnings over the last three to five years at an annual rate of
18 percent or better, we'd get a wide variety of companies. Some would have led
for one or two years but also experienced one or two poor years. In our view,
the sustainability of growth is key.
LAMCO: How do you define "quality," as used in "quality growth?"
JOSTRAND: We use the term "durable business franchise." That's a mouthful, but
it really comes down to what is most important of all, but most difficult to
judge, and that is management. We believe in backing the endeavors of above
average management teams. This takes time, it takes interviewing, it takes
getting to know these people, it takes checking with people who have known them
over time. We need to validate our impressions and conclusions, and then do it
over and over again.
We want management strategy to be consistent with what we observe the
opportunity to be, and we think that top management needs to bring in middle
management and employees to share the vision and implement the strategy. We like
to see incentives in place to make sure that everybody, over time, continues to
pursue those goals and objectives. We pay attention to the little things, for
instance, how a company manages through new product introductions, product
revisions or service upgrades. We want to make sure that their customers remain
fully satisfied with the product or service. It may be an on-time record, a
fulfillment rate or a retailer who always has the right inventory. It's very
hands-on and time and research intensive. But, it's the only way that we are
able to conclude that there is real durability in a company's performance
through time.
[begin callout]
"The way in which we separate and identify quality growth stocks is by employing
an outstanding group of analysts who do extensive, old-fashioned field work to
research companies and industries."
[end callout]
LAMCO: Looking at it from a portfolio perspective, how many stocks are in a
portfolio such as the All-Star Growth Fund and how do you construct your
portfolios?
JOSTRAND: Portfolio construction is really a fall-out from our research process.
To some extent it's diversification among industries, because finding leaders in
an industry is a self-limiting process. There's only going to be one or two
leaders in an industry. As a result, we end up finding companies in some obvious
growth areas and we find others in some not so obvious growth areas.
In terms of number of securities, it's 40 to 50 stocks. Recently, we have
moved down the capitalization spectrum somewhat into the mid-cap area. Even
though we spend a great deal of time getting to know a company, we'll initiate a
new position quite modestly. As we gain experience and greater experience with
the company, we will often increase the position.
As far as industries go, we don't start with industry weighting guidelines.
What we do tends to be a residual of our process, so, as a result, we may be
absent or void in certain industries. An example of that right now would be the
utility or energy sector as well as some segments of capital goods or basic
industries sectors. With more mature industries that are extremely competitive,
it's difficult to sustain growth over long periods of time.
LAMCO: Is there an example of an industry where you're overweight right now?
JOSTRAND: Financials, although banks traditionally have not been perceived as
steady, above-average growers. The industry has been going through an extended
wave of mergers and acquisitions, and that has driven some very nice returns.
Some franchises within the industry have been in specialty niches and have done
very well. One of the biggest, and it's a more obvious name, is Freddie Mac, the
Federal Home Loan Mortgage Corporation. Among specialty banks, the credit card
company MBNA has been a terrific growth company and continues to perform well
despite rising consumer delinquencies.
LAMCO: Would you hold a stock through a tough period as long as you felt that it
maintained that durable business franchise?
JOSTRAND: We do tend to be patient with companies. Almost all companies go
through growing pains. The market, in general, treats those kinds of events more
harshly than it used to and this has led to greater volatility within stocks.
That's a problem for us as long-term investors, so we do tend to be a little bit
more patient with good managements as long as we understand the issues and are
convinced of the viability of management's plans for the future.
7
<PAGE>
MANAGER INTERVIEW
................................................................................
LAMCO: You mentioned that you had moved to a slightly higher mid-cap allocation.
Is that a function of today's high valuations?
JOSTRAND: In part, yes. Some of the mega-cap stocks that have done so well for
the past two years are getting to extraordinary evaluations. To the extent that
better companies in the mid-cap area have been left behind yet are performing
very well, we are coming up with some attractive buys. So, we have begun to move
in that direction, but not from any top-down strategic point of view.
LAMCO: That's an interesting point. You have said before that the emergence of
ideal buy candidates is fairly rare for William Blair. Is it even rarer today,
given the stock market's valuation?
JOSTRAND: Today's high price/earnings ratios can be a challenge, but we believe
they are supportable based on our low inflation, low interest rate environment
and the improved competitiveness of U.S. companies, which has resulted in higher
profitability. We are trying to be mindful of things that would cause those
fundamental underpinnings to change; in our opinion, they would likely be a
change in inflation and interest rates.
[begin callout]
"You could describe our growth stock philosophy as going after 'a slice of
growth,' not just any growth stock. In other words, we are after the highest
quality, most consistent growth stocks."
[end callout]
One thing to bear in mind is that the number of initial public offerings
over the past few years has resulted in more publicly traded companies. I think
the number of stocks traded on the NASDAQ has doubled in the last couple of
years. So, there are many more stocks to choose from, but finding those with
sustainable, durable growth prospects will always be a challenge.
LAMCO: You are a self-described long-term investor. Is there a typical holding
period at William Blair?
JOSTRAND: Our holding periods have averaged out to about three or four years.
Heightened volatility in individual securities may have caused that to drift
downward, however. The emergence of so-called momentum investing, where a stock
may be aggressively bought or sold based on a quarterly announcement, takes
stocks to valuations that are not supportable, either on the high side or low
side. We tend to add to or trim positions based on that. As a rule, however, we
sell a stock based on fundamentals; for instance, if a company has begun to
drift from its strategic focus or its ability to execute is hampered because of
internal or external issues.
LAMCO: Do you set a target sell price when you buy a stock?
JOSTRAND: We really don't; it's a constant process of reevaluation. We think it
narrows your thinking too much and can cause you to lose track of the two or
three really important aspects of an investment. Some of our best buys have been
stocks that we've owned for well over 10 years.
LAMCO: Give us some insights into the All-Star Growth Fund portfolio, please.
JOSTRAND: Let me start with a couple of recent purchases. One new idea is MSC
Industrial, which is a Long Island, New York-based distributor of industrial
products. MSC primarily distributes to maintenance/repair organizations, the
so-called "MRO" industry. MSC has an inventory of over 330,000 different part
numbers and has been growing its business, both sales and earnings, at over 30
percent annually. That's terrific business in what would normally be thought of
as an older, more mature industry. We're dealing with industrial parts here, not
high tech. MSC, however, is distinguished by a management that is focused on
giving employees significant autonomy but with well defined goals, procedures
and objectives. MSC also draws on superior information systems, including a
customer database. They have used this to develop a strong direct mail and
telephone sales support expertise. It has also led to MSC to offer, in the eyes
of its customers, superior service based on high in-stock rates, same-day
shipments, next-day deliveries and very low back order rates. That helps a
company gain share and grow its business with existing customers. The MSC model
also means lower costs, such as less paperwork and more efficient inventory
management.
An example of a longstanding holding is Pfizer, the pharmaceutical company.
However, with Pfizer we've had to peel off a little of our position because the
company was up more than 80 percent last year and gained another 30 percent this
past quarter. Pfizer has a potential blockbuster drug with Viagra, its new
impotence formulation. It could be a $2 billion product. So, Pfizer is a
terrific company, but it had reached valuation levels that were difficult to
justify. Selling part of our holding allowed us to make room for companies such
as MSC.
8
<PAGE>
MANAGER INTERVIEW
................................................................................
LAMCO: What about an example of one of the mid-cap stocks you mentioned earlier?
JOSTRAND: Aspen Technology is a good one. It's a Boston-based company that
plays to a major theme in the manufacturing world today, and that's
productivity. Aspen provides software to process industry companies, such as
refineries and pharmaceutical companies. The software is used for modeling,
design, automation and process optimization. Some of it works off-line in the
design stage or during plant upgrade, while some is on-line operations software
that helps plant managers maintain optimal output and minimal input. Aspen has a
blue chip list of clients and won several more in the first quarter. It sells
unique products where there's limited competition and delivers a measurable,
bottom line benefit to its customers. Another favorable aspect to Aspen's
business is that two-thirds of its revenues and earnings is recurring in some
sense, through consulting services or its unique term licensing approach. Most
software companies are paid upfront. About half of Aspen's sales is on a term
basis, so that after th ree to five years the customer has to come back for
another license. We expect Aspen to do over $250 million in sales this year, up
from just under $200 million last year.
[begin callout]
"...What is most important of all, but most difficult to judge ... is
management."
[end callout]
Another company we like is Linear Technology, a Milpitas, California,
producer of analog circuits whose stock surged 18 percent in the first quarter.
Notice, I said analog circuits, not digital. Linear's circuits interface with
real world systems to measure temperatures, pressures and other factors. Linear
has a very well balanced market; a little less than a third of its output is
sold to the computer industry, another major portion goes to the telecom
industry and a third major customer segment is industrial, both process and
manufacturing industries. Any company that could have a sensor on a machine or a
machine control system is a potential customer. Linear is a good example of how
we'll look through an industry where there's substantial growth to find a
company that can produce the kind of sustainability we want. Linear's products
last four or five years, while a memory chip can be outdated in 18 months or
less. Moreover, Linear's circuits are incredibly difficult to design. Once that
circuit is designed in, it's relatively inexpensive, but changing it requires a
lot of nonrecurring engineering costs. As a result, it's very difficult to get
designed out of customers' systems. Linear's margins are good, and they look
very sustainable going forward.
LAMCO: To wrap up, what are your thoughts about the stock market?
JOSTRAND: We expected a positive return from the market this year, but nothing
like we experienced in the first quarter ... or, for that matter, what we've
seen over the past three years. On a short-term basis, we're moderately
cautious. But, underneath that, the fundamentals appear fairly sound. If there
was a signal event last year, even more than the Asian crisis, it was the fact
that inflation decelerated, rather than accelerated as many expected, and that
it continues into this year. As a result, interest rates are down. Those factors
- -- inflation and interest rates -- are the two key underpinnings supporting
higher P/E ratios, in our view. I will also say that the demographics do paint a
powerful long-term picture. As baby boomers mature into their 40s, 50s and 60s
- -- the age cohort that tends to save at higher rates -- we have a factor that
appears to bode well for the long term.
[begin callout]
"Today's high price/earnings ratios can be a challenge, but we believe they are
supportable based on our low inflation, low interest rate environment and the
improved competitiveness of U.S. companies ..."
[end callout]
9
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (98.4%) SHARES MARKET VALUE
<S> <C> <C>
AEROSPACE (2.0%)
Boeing Co. 39,000 $ 2,032,875
Lockheed Martin Corp. 15,000 1,687,500
------------
3,720,375
------------
AUTO, TIRES & ACCESSORIES (1.0%)
LucasVarity PLC ADR 45,000 1,859,063
------------
BANKS (6.2%)
Associated Banc-Corp. 13,961 753,021
Bank United Corp., Class A 15,600 780,000
CCB Financial Corp. 6,300 696,544
Citicorp 20,000 2,840,000
Commercial Federal Corp. 11,613 422,423
Crestar Financial Corp. 14,000 827,750
State Street Corp. 31,500 2,143,969
Sovereign Bancorp, Inc. 42,000 763,875
TCF Financial Corp. 24,000 817,500
Wells Fargo & Co. 5,000 1,656,250
------------
11,701,332
------------
BUSINESS SERVICES (8.2%)
Alternative Resources Corp. (a) 28,100 604,150
American Management Systems (a) 36,100 990,494
Cendant Corp. (a) 41,700 1,652,362
Cintas Corp. 12,700 657,225
Cognizant Corp. (a) 27,100 1,554,862
First Data Corp. 38,470 1,250,275
GartnerGroup, Inc., Class A (a) 39,600 1,480,050
Interim Services, Inc. (a) 22,200 749,250
Iron Mountain, Inc. 10,619 398,213
National Data Corp. 32,900 1,367,406
Network General Corp. (a) 21,837 1,446,701
Rental Service Corp. (a) 18,000 418,500
Robert Half International, Inc. (a) 18,450 885,600
Shared Medical Systems Corp. 23,500 1,841,813
------------
15,296,901
------------
CHEMICALS (4.8%)
Cytec Industries, Inc. (a) 15,000 825,937
Hanna (M.A.) Co. 44,693 1,092,185
Hercules, Inc. 25,000 1,234,375
International Specialty Products,
Inc. (a) 30,000 526,875
Minerals Technologies, Inc. 54,790 2,452,759
Monsanto Co. 30,000 1,560,000
OM Group, Inc. 14,400 606,600
RPM, Inc. 42,500 757,031
------------
9,055,762
------------
COMMUNICATIONS EQUIPMENT (2.1%)
ADC Telecommunications, Inc. (a) 24,100 664,256
Black Box Corp. (a) 18,800 693,250
Nokia Corp. ADR 25,000 $ 2,698,438
------------
4,055,944
------------
COMPUTER & BUSINESS EQUIPMENT (1.4%)
Adaptec, Inc. (a) 35,000 686,875
Komag, Inc. (a) 34,332 502,106
Zebra Technologies Corp.,
Class A (a) 37,803 1,450,690
------------
2,639,671
------------
COMPUTER SERVICES & SOFTWARE (6.6%)
Aspen Technology, Inc. 17,500 721,875
Acxiom Corp. (a) 66,900 1,714,313
Automatic Data Processing, Inc. 46,400 3,158,100
Cognos, Inc. (a) 47,600 1,341,725
Concord EFS, Inc. (a) 27,700 957,381
Cotelligent Group, Inc. (a) 30,000 888,750
Microsoft Corp. (a) 17,200 1,538,325
SPSS, Inc. (a) 31,900 749,650
SunGard Data Systems, Inc. (a) 35,100 1,292,119
------------
12,362,238
------------
CONSUMER PRODUCTS (1.3%)
Blyth Industries, Inc. (a) 26,200 894,075
Cole National Corp., Class A (a) 21,600 834,300
Mattel, Inc. 17,000 673,625
------------
2,402,000
------------
DIVERSIFIED (1.1%)
General Electric Co. 20,000 1,721,250
Lydall, Inc. (a) 23,000 415,438
------------
2,136,688
------------
DRUGS & HEALTH CARE (11.6%)
Allergan, Inc. 26,700 1,014,600
Amgen, Inc. 9,300 566,428
Apria Healthcare Group, Inc. (a) 45,800 406,475
Bard (C.R.) Inc. 20,000 735,000
Beverly Enterprises 47,000 625,687
Biomet, Inc. 45,000 1,350,000
Boston Scientific Corp. (a) 1,500 101,250
Cardinal Health, Inc. 14,300 1,261,081
Covance, Inc. (a) 56,500 1,387,781
DENTSPLY International, Inc. 36,000 1,122,750
Elan Corp. ADR (a) 21,100 1,363,588
Hanger Orthopedic Group, Inc. (a) 28,000 470,750
HEALTHSOUTH Corp. (a) 63,800 1,790,388
Integrated Health Services, Inc. 24,500 963,156
Maxxim Medical, Inc. (a) 28,000 803,250
Medtronic, Inc. 27,500 1,426,563
Millipore Corp. 16,500 573,375
Omnicare, Inc. 28,400 1,125,350
Pfizer, Inc. 16,000 1,595,000
</TABLE>
10 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
DRUGS & HEALTH CARE (CONT.)
Pharmerica, Inc. (a) 43,189 $ 642,436
R.P. Scherer Corp. (a) 13,600 918,000
Shire Pharmaceuticals ADR 31,184 668,507
Sun Healthcare Group, Inc. (a) 57,600 1,072,800
------------
21,984,215
------------
ELECTRONICS & ELECTRICAL EQUIPMENT (6.9%)
Analog Devices, Inc. (a) 15,333 511,739
Arrow Electronics, Inc. (a) 60,000 1,623,750
CFM Technologies, Inc. (a) 29,300 437,669
General Scanning, Inc. (a) 34,000 731,000
Hubbell, Inc., Class B 19,000 957,125
Intel Corp. 37,000 2,886,000
Linear Technology Corp. 16,400 1,131,600
Microchip Technology, Inc. 10,500 220,500
Molex, Inc. 62,218 1,727,208
Photronics, Inc. (a) 25,000 700,000
PRI Automation, Inc. (a) 22,000 576,125
SBS Technologies (a) 22,000 632,500
Xilinix, Inc.(a) 23,300 872,294
------------
13,007,510
------------
FINANCIAL SERVICES (12.1%)
Aames Financial Corp. 29,000 402,375
CMAC Investment Corp. 15,000 1,001,250
Countrywide Credit Industries, Inc. 55,000 2,925,312
Federal Home Loan Mortgage Corp. 93,000 4,411,687
Finova Group, Inc. 17,400 1,024,425
Household International, Inc. 13,600 1,873,400
MBNA Corp. 57,200 2,048,475
Money Store, Inc. (The) 45,800 1,462,738
Morgan Stanley, Dean Witter,
Discover & Co. 41,250 3,006,094
Paychex, Inc. 15,000 868,125
Resource Bancshares
Mortgage Group, Inc. 35,000 555,625
Southern Pacific Funding Corp. (a) 30,500 468,938
Travelers Group, Inc. 50,000 3,000,000
------------
23,048,444
------------
FOOD, BEVERAGE & RESTAURANTS (3.2%)
Brinker International, Inc. (a) 35,000 765,625
Canandaigua Brands, Class A (a) 13,916 794,951
Diageo PLC ADR 25,920 1,261,980
Dole Food Co. 30,000 1,451,250
Hormel Foods Corp. 26,000 1,009,125
Performance Food Group Co. (a) 32,378 667,796
------------
5,950,727
------------
HOTELS & LEISURE (0.7%)
Carnival Corp., Class A 19,400 1,353,150
INDUSTRIAL EQUIPMENT (4.0%)
Albany International 29,500 $ 770,687
Barnett, Inc. (a) 19,000 410,875
Caterpillar, Inc. 36,000 1,982,250
DT Industries, Inc. 14,000 537,250
Fastenal Co. (a) 13,100 568,212
Illinois Tool Works, Inc. 25,100 1,625,225
Kulicke & Soffa Industries, Inc. (a) 37,500 815,625
MSC Industrial Direct Co., Inc. (a) 14,300 774,881
------------
7,485,005
------------
INSURANCE (8.1%)
ACE Limited 75,000 2,826,563
AFLAC, Inc. 35,000 2,213,750
American International Group, Inc. 15,000 1,889,062
Exel Limited 40,000 3,100,000
HCC Insurance Holdings, Inc. 35,500 816,500
Progressive Corp. 18,000 2,424,375
Transamerica Corp. 18,000 2,097,000
------------
15,367,250
------------
METALS & MINING (0.4%)
Freeport-McMoRan Copper
& Gold, Inc., Class A 40,000 797,500
------------
OIL & GAS (1.9%)
Global Industries Ltd. (a) 36,500 743,687
IRI International Corp. (a) 53,000 649,250
Ocean Energy, Inc. (a) 35,750 842,359
Swift Energy Co. (a) 32,446 553,608
Triton Energy Corp. (a) 5,600 205,800
Union Texas Petroleum Holdings, Inc. 30,000 663,750
------------
3,658,454
------------
PAPER & PLASTIC (1.6%)
AptarGroup, Inc. 9,567 574,618
Caraustar Industries, Inc. 13,000 429,000
Champion International Corp. 25,000 1,357,812
Consolidated Papers, Inc. 9,000 576,000
------------
2,937,430
------------
PUBLISHING (1.5%)
R. R. Donnelley & Sons Co. 66,400 2,726,550
------------
RETAIL TRADE (6.6%)
CVS Corp. 20,200 1,525,100
Home Depot, Inc. 27,900 1,881,506
Lowe's Companies, Inc. 18,200 1,277,413
Marks Brothers Jewelers, Inc. (a) 31,000 614,188
May Department Stores Co. 25,000 1,587,500
Petco Animal Supplies, Inc. 35,012 682,734
Staples, Inc. (a) 76,500 1,773,844
</TABLE>
11 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS / PER SHARE CHANGES IN NET ASSETS AS OF MARCH 31, 1998
(UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
RETAIL TRADE (CONT.)
The Sports Authority, Inc. (a) 49,000 $ 802,375
Viking Office Products, Inc. (a) 101,700 2,364,525
------------
12,509,185
------------
TELECOMMUNICATIONS (3.0%)
Airtouch Communications, Inc. (a) 33,000 1,614,937
IXC Communications, Inc. (a) 20,700 1,181,194
Mobile Telecommunication
Technologies Corp. (a) 20,746 466,785
Sprint Corp. 35,000 2,373,438
------------
5,636,354
------------
TRANSPORTATION (2.1%)
AMR Corp. (a) 16,000 $ 2,291,000
Hub Group, Inc., Class A (a) 24,500 684,469
U.S. Freightways Corp. 26,900 968,400
------------
3,943,869
------------
TOTAL COMMON STOCKS
(Cost $121,216,059) 185,635,617
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
----------
<S> <C> <C>
REPURCHASE AGREEMENT (2.7%)
ABN AMRO Chicago Corp., dated 3/31/98, 5.95%, to be repurchased at
$5,158,853 on 4/01/98, collaterized by U.S. Treasury notes and bills with
various maturities to 2002, with a current market value of $5,278,714. $ 5,158,000 5,158,000
------------
TOTAL INVESTMENTS (101.1%) (COST $126,374,059)(b) 190,793,617
OTHER ASSETS AND LIABILITIES, NET (-1.1%) (2,078,301)
------------
NET ASSETS (100.0%) $188,715,316
------------
NET ASSET VALUE PER SHARE (13,141,220 SHARES OUTSTANDING) $14.36
------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Gross unrealized appreciation and depreciation of investments at March 31,
1998 is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $67,245,055
Gross unrealized depreciation (2,825,497)
------------
Net unrealized appreciation $64,419,558
------------
</TABLE>
Acronym Name
- ----------- ---------------------------
ADR American Depository Receipt
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1998 -----------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE CHANGES IN NET ASSETS
Net asset value at beginning of period $ 12.89 $ 11.27 $ 10.55 $ 9.95 $ 10.54 $ 10.28
-------- -------- -------- -------- -------- --------
Net investment income (loss) -- (0.02) 0.01 0.31 0.23 0.18
Distributions declared (0.35) (1.24) (1.02) (0.76) (0.58) (0.48)
Impact of shares issued in
dividend reinvestment (a) -- -- (0.13) -- -- --
Net realized and unrealized
gain (loss) on investments 1.82 2.88 1.86 1.05 (0.24) 0.56
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 14.36 $ 12.89 $ 11.27 $ 10.55 $ 9.95 $ 10.54
-------- -------- -------- -------- -------- --------
</TABLE>
(a) Effect of dividend reinvestment shares at a price below net asset value in
accordance with the 1996 Automatic Dividend Reinvestment and Cash Purchase Plan.
12
<PAGE>
THE THREE LIBERTY ALL-STAR FUNDS / DISTRIBUTION POLICY / DIVIDEND REINVESTMENT
PLAN
...............................................................................
THE THREE LIBERTY ALL-STAR FUNDS
A companion fund to Liberty All-Star Growth Fund, Inc. is also listed on
the New York Stock Exchange, Liberty All-Star Equity Fund. In addition, a
variable annuity version of Liberty All-Star Equity Fund is available as part of
the Keyport Advisor variable annuity from Keyport Life Insurance Company, one of
the Liberty Financial Companies as is Liberty Asset Management Company. Variable
annuities, among other features, offer a way to accumulate retirement funds on a
tax-deferred basis and to distribute those funds efficiently after retirement.
<TABLE>
<CAPTION>
NYSE NET ASSETS
FUND TICKER FUND AT 4/30/98
NAME TYPE SYMBOL OBJECTIVE (millions)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liberty All-Star Closed-End ASG Growth $ 191
Growth Fund, Inc.
Liberty All-Star Closed-End USA Growth & Income 1,289
Equity Fund
Liberty All-Star Equity Open-End,
Fund, Variable Series Variable Annuity -- Growth & Income 30
Growth & Income
- ------------------------------------------------------------------------------------------
</TABLE>
Additional information on all three funds is available from your broker.
You may also contact Investor Assistance at 1-800-LIB-FUND (1-800-542-3863) for
either of the closed-end funds. For the variable annuity fund, you may call
Keyport at 1-800-367-3653.
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy is to pay distributions on
its common stock 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. If, for any calendar year, the total distributions required by the 10
percent pay-out policy exceed the Fund's net investment income and net realized
capital gains, the excess will generally be treated as a tax-free return of
capital, reducing the shareholder's adjusted basis in his or her shares. If the
Fund's net investment income and net realized capital gains for any year exceed
the minimum amount required to be distributed under the 10 percent pay-out
policy, the Fund may, at its discretion, retain and not distribute net realized
capital gains to the extent of such excess.
DIVIDEND REINVESTMENT PLAN
Each registered shareholder of the Fund will automatically be a participant in
the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan unless the
shareholder specifically elects otherwise by writing to the Plan Agent, State
Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-8200 or by
calling 1-800-LIB-FUND (1-800-542-3863). If your shares are held for you by a
broker, bank or other nominee, you should contact the institution holding your
shares as to whether you wish to participate, or not participate, in the Plan.
Participants in the Plan have their dividends and distributions automatically
reinvested in additional shares of the Fund. Participants are kept apprised of
the status of their account through quarterly statements.
13
<PAGE>
NOTES
................................................................................
14
<PAGE>
NOTES
................................................................................
15
<PAGE>
[back cover]
[Liberty All*Star logo] LIBERTY
ALL*STAR
--------
GROWTH FUND
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
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & 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 LLP
150 Federal Street
Boston, Massachusetts 02110
DIRECTORS
Robert J. Birnbaum*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
Dr. John J. Neuhauser*
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
Christopher S. Carabell, Vice President
Timothy J. Jacoby, Treasurer
J. Kevin Connaughton, 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).
[Liberty financial logo]
