PRESIDENT'S LETTER
................................................................................
To Our Fellow Shareholders: May 1999
The net asset value (NAV) of a common share of the Fund decreased from $13.03
on December 31, 1998, to $12.28 on March 31, 1999, after deducting the
distribution of 31 cents declared during the quarter. The market price for a
share of the Fund traded in a range from $10.125 to $11.938 before closing the
quarter at $10.625. The ending price represented a discount to NAV of 13.5
percent compared with a discount to NAV of 12.2 percent on December 31, 1998.
Key investment results and comparisons are noted below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
First Quarter Latest 12 Months
- ---------------------------------------------------------------------------------------------------------------
LIBERTY ALL-STAR GROWTH FUND, INC:
<S> <C> <C>
Shares Valued at Net Asset Value (3.4%) (2.6%)
Shares Valued at Net Asset Value with Dividends Reinvested (3.0%) (2.1%)
Shares Valued at Market Price with Dividends Reinvested (4.4%) (9.9%)
Fund's Closing Price Range $11.875 to $10.375 $14.063 to $8.75
Fund's Discount Range 14.1% to 7.5% 14.5% to 0.8%
Lipper Growth Mutual Fund Average 4.4% 13.6%
Lipper Mid-Cap Mutual Fund Average (0.4%) 0.2%
Russell Midcap Growth Index 3.4% 8.9%
Figures shown for the Fund and the Lipper Mutual Fund Averages are total returns, which include dividends,
after deduction of fund expenses. The Fund's reinvested returns for the latest 12 months assumes the exercise
of all primary subscription rights in the recent rights offering. Figures shown for the unmanaged Russell
Midcap Growth Index are total returns including income.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As the table shows, during the first quarter the Fund's NAV decreased 3.4
percent, which compares with a 4.4 percent increase for the Lipper Growth Mutual
Fund Average, a decrease of 0.4 and an increase of 3.4 percent for the Lipper
Mid-Cap Mutual Fund Average and Russell Midcap Growth Index, respectively. For
the latest 12 months, the Fund's NAV decreased 2.6 percent compared with a 13.6
percent increase for the Lipper Growth Mutual Fund Average, and increases of 0.2
percent and 8.9 percent for the Lipper Mid-Cap Mutual Fund Average and Russell
Midcap Growth Index, respectively.
The extremely narrow market leadership experienced during 1998 came to a
climax during the first quarter. Large capitalization stocks again outperformed
smaller cap stocks, but returns for large, mid and small cap indices were
greatly influenced by a narrow group of stocks. This narrow leadership has
caused considerable frustration for portfolio managers, as many of those stocks
are very highly priced or quite speculative. The narrow leadership within the
small and mid-cap indices was largely attributable to Internet stocks. During
the past twelve months, more than half of the gain in the Russell Midcap Growth
Index was attributable to just five Internet stocks. The growth managers in the
Fund invest in small and mid-cap stocks where they focus on sustainable earnings
growth, so many of those speculative Internet related issues would not meet
their criteria.
1
<PAGE>
PRESIDENT'S LETTER
................................................................................
In April, Liberty Asset Management Company, the Fund Manager, recommended,
and the Board of Directors approved, the hiring of a new Portfolio Manager, M.A.
Weatherbie & Co., Inc. to replace Mississippi Valley Advisors Inc. effective May
3, 1999. Matthew A. Weatherbie, founder and president of the firm, will serve as
one of the three portfolio managers of the Fund. Prior to founding the firm in
late 1995, Mr. Weatherbie managed portfolios at Putnam Investments and MFS
Investment Management. He has 26 years of investment experience. Mr. Weatherbie
and his investment team practice a small-capitalization growth investment style,
which will be used to manage their portion of the Fund's assets. The Fund's
portfolio management agreement with M.A. Weatherbie & Co., Inc., which will be
submitted to shareholders for ratification at the 2000 annual meeting, is at the
same management fee rate and on substantially the same other terms and
conditions as the Fund's agreement with its other Portfolio Managers.
Mr. Richard R. (Chris) Christensen, President of the Fund since 1984, has
retired and I have been elected by the Board of Directors to succeed him. I will
also continue to serve as Chief Investment Officer of the Fund. Chris served the
Fund with distinction; we thank him and wish him well in his retirement.
The annual meeting of shareholders was held on April 21, 1999, where Robert
J. Birnbaum was re-elected, and William E. Mayer and John V. Carberry were
elected as Directors. Mr. Birnbaum has served as a Director since November 6,
1995, and Messrs. Carberry and Mayer have served as Directors since June 30,
1998 and December 17, 1998, respectively. All other Directors continue in office
and all other proposals placed before the meeting were approved.
Thank you for your continuing support of the Fund.
Sincerely,
/s/ William R. Parmentier, Jr.
- --------------------------------------
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc. and
Liberty Asset Management Company
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 growth rates.
WILLIAM BLAIR & COMPANY, L.L.C.
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 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 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).
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MARKET CAPITALIZATION SPECTRUM
AS OF MARCH 31, 1999 SMALL LARGE
(UNAUDITED) ------------------------------
S & P
Smallcap William Oppen- Total S&P
600 Index MVA* Blair heimer Fund 500 Index
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Number of Holdings 600 72 36 31 133 500
- ------------------------------------------------------------------------------------------------------------
Percent of Holdings in S&P 500 -- 6% 67% 76% 50% --
- ------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $0.9 $1.3 $44.0 $54.0 $33.1 $101.3
- ------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth -- 23% 27% 20% 24% 18%
- ------------------------------------------------------------------------------------------------------------
Dividend Yield 0.9% 0.6% 0.4% 1.3% 0.8% 1.3%
- ------------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 17x 16x 35x 18x 23x 26x
- ------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 2.1x 3.0x 6.6x 4.0x 4.5x 5.9x
- ------------------------------------------------------------------------------------------------------------
* M.A. Weatherbie & Co., Inc. replaced Mississippi Valley Advisors Inc. effective May 3, 1999.
</TABLE>
3
<PAGE>
TOP 50 HOLDINGS
................................................................................
<TABLE>
<CAPTION>
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
3/31/99 12/31/98 SECURITY NAME ($000) NET ASSETS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 2 Citigroup, Inc. $5,749 3.1%
2 1 Freddie Mac 5,027 2.7
3 8 Nokia Corp. ADR 3,894 2.1
4 4 Staples, Inc. 3,772 2.0
5 11 AFLAC, Inc. 3,538 1.9
6 3 Intel Corp. 3,467 1.9
7 10 Sprint Corp. 3,434 1.8
8 5 Automatic Data Processing, Inc. 3,310 1.8
9 6 Home Depot, Inc. 3,237 1.7
10 14 AirTouch Communications, Inc. 3,189 1.7
11 18 American International Group, Inc. 2,714 1.5
12 16 Texas Instruments, Inc. 2,561 1.4
13 19 Minerals Technologies, Inc. 2,529 1.4
14 39 Kulicke and Soffa Industries, Inc. 2,522 1.3
15 38 Morgan Stanley Dean Witter & Co. 2,498 1.3
16 9 XL Capital Ltd.* 2,430 1.3
17 21 USFreightways Corp. 2,402 1.3
18 35 Microsoft Corp. 2,366 1.3
19 24 AMR Corp. 2,343 1.3
20 13 ACE Limited 2,339 1.3
21 27 General Electric Co. 2,213 1.2
22 33 Lowe's Companies, Inc. 2,202 1.2
23 12 Countrywide Credit Industries, Inc. 2,063 1.1
24 42 State Street Corp. 2,038 1.1
25 22 MBNA Corp. 2,023 1.1
26 26 Medtronic, Inc. 1,973 1.1
27 17 CVS Corp. 1,900 1.0
28 37 Biomet, Inc. 1,887 1.0
29 20 Covance, Inc. 1,850 1.0
30 36 Carnival Corp. 1,836 1.0
31 25 Acxiom Corp. 1,773 0.9
32 58 Minnesota Mining & Manufacturing Co. 1,769 0.9
33 40 Office Depot, Inc. 1,767 0.9
34 31 Wells Fargo & Co. 1,753 0.9
35 29 Progressive Corp. 1,722 0.9
36 43 Lockheed Martin Corp. 1,696 0.9
37 28 Molex, Inc. 1,654 0.9
38 7 R.R. Donnelley & Sons Co. 1,609 0.9
39 60 Linear Technology Corp. 1,609 0.9
40 49 SunGard Data Systems, Inc. 1,564 0.8
41 56 Illinois Tool Works, Inc. 1,553 0.8
42 15 Sterling Commerce, Inc. 1,522 0.8
43 50 May Department Stores Co. 1,467 0.8
44 59 Elan Corp. ADR 1,423 0.8
45 53 Cognos, Inc. 1,412 0.8
46 62 Caterpillar, Inc. 1,378 0.7
47 57 Monsanto Co. 1,378 0.7
48 61 Diageo PLC ADR 1,373 0.7
49 65 Boeing Co. 1,365 0.7
50 90 Cooper Cameron Corp. 1,321 0.7
</TABLE>
*Formerly EXEL Limited
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 1999.
<TABLE>
<CAPTION>
SHARES
======================================================
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 3/31/99
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aspen Technology, Inc. 57,101 84,801
Compaq Computer Corp. 30,000 30,000
Computer Associates International, Inc. 30,000 30,000
Cumulus Media, Inc. Class A 50,000 50,000
Eagle USA Airfreight, Inc. 22,000 22,000
MSC Industrial Direct Co., Inc. 41,800 70,000
The Men's Wearhouse, Inc. 27,000 27,000
QuadraMed Corp. 42,600 42,600
Universal Foods Corp. 34,000 34,000
Webster Financial Corp. 30,000 30,000
Allergan, Inc. (15,700) 0
Gartner Group, Inc., Class A (52,800) 0
Hormel Foods Corp. (26,000) 0
Household International, Inc. (39,900) 0
Hubbell, Inc., Class B (21,600) 0
IMS Health, Inc.* (53,400) 0
IXC Communications, Inc. (33,500) 0
LucasVarity PLC ADR (45,000) 0
Network Associates, Inc. (22,755) 0
PRI Automation, Inc. (15,381) 59,166
R.R. Donnelley & Sons Co. (21,400) 50,000
Sprint Corp. (PCS Group) (17,500) 0
Transamerica Corp.* (36,000) 0
</TABLE>
*Adjusted for stock split.
5
<PAGE>
MANAGER INTERVIEW
................................................................................
[PHOTO OF JOHN F. JOSTRAND]
[CAPTION]
JOHN F. JOSTRAND
William Blair & Company, L.L.C.
Manager Interview: Dedication to Research
and a Structure of Employee Ownership Help
William Blair Find and Invest in Quality,
Consistently Growing Companies
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 who lead research aimed at identifying companies of all
sizes that have the opportunity to grow in a sustainable fashion for extended
periods of time. Recently, we had the opportunity to visit with Principal and
Portfolio Manager John F. Jostrand.
[Callout]
The views expressed in this interview represent the manager's views at the time
of the discussion and are subject to change.
[End Callout]
LAMCO: As was the case last year, you're in the lead-off position in the first
quarterly report of the year. Batting first isn't always easy, especially
considering the gyrations of the stock market for the last two quarters. From a
low on October 8, the stock market went on a tear and the Dow Jones Industrial
Average closed above 10,000 for the first time on March 29. What do you make of
this six-month period?
JOSTRAND: If you go back a few weeks before that low on October 8 and compare
interest rates then and now, you'll find rates are down about 50 basis points,
or 0.5 percent, as measured at almost any point on the Treasury yield curve.
And, as you say, the stock market is up. So, interest rates have fallen and
inflation continues to be very moderate, and that combination is very positive
for equities. The market's rebound from October also confirms that the U.S. did
not catch the so-called "Asian contagion." Some have said we have been in a
profit recession, and, in fact, profit growth for the Standard & Poor's 500 was
marginally down last year. I don't call that a recession -- last year we slipped
from strong mid-teens percentage growth rates in profits into, essentially, a
flat profit growth picture. Still, profitability should rebound to the solid
single-digit growth category in the second half of this year. I think the
rebound from October 8 is really a recognition that maybe the sell-off was far
more drastic than it should have been.
LAMCO: The first quarter of 1999 had a few hiccups. Interest rates backed up a
bit during the quarter, especially in February.
JOSTRAND: Yields on two-year Treasuries fell to 4 percent in early October and
have retraced two-thirds of that, putting them back at the 5 percent level. Some
of that decline was a little bit of an over reaction. And, the rebound reflects
a sense that the profit cycle may be improving. At William Blair, we're in the
camp that profits by the end of this year will be close to a normal long-term
trend line rate, that is, in the 6 to 7 percent range.
LAMCO: Do you think 6 to 7 percent profitability growth is going to be good
enough to sustain the market at these levels?
JOSTRAND: We think the market needs that to remain at these levels. You might
quibble a little bit as to whether the Dow or the S&P 500 are slightly
overvalued. But, at this point, I think you have to say that small and mid-cap
stocks have been in their own bear market and that values are certainly emerging
there. That's where we're spending the bulk of our research time.
LAMCO: For investors, then, you feel it's pretty much staying the course?
JOSTRAND: I would definitely say so. The key thing is to make sure that the
profit cycle broadens out and that companies beyond the top 30 to 50 in terms of
market value begin to show a resurgence in profit growth. Or, at least, there is
some redistribution of profit growth. That's when I think we'll get a broader
overall market.
LAMCO: You mentioned that William Blair is spending a lot of time researching
small and mid-cap stocks. Is that because valuations are so high among the large
and mega-cap stocks?
JOSTRAND: At William Blair, we have a traditional strength of good, solid
research in those areas, and so it's not necessarily a change. But, from a
portfolio standpoint, we continue to look aggressively in that area for
catalysts to take advantage of what are clearly improved values. Certainly,
relative to the large cap sector the values are compelling. In the first quarter
the small cap sector was down about 5 percent versus about a 5 percent gain for
the S&P 500 Index. So, there continues to be a wide disparity.
6
<PAGE>
MANAGER INTERVIEW
................................................................................
LAMCO: How do you look at the continuing performance gap between the large caps
and the small caps?
JOSTRAND: I think that large companies have benefited from two or three trends,
and smaller companies haven't benefited from them yet. The big cap companies
came out of a period of reindustrialization, downsizing and restructuring in
which they did a great job of getting their profit margins back up. They took
advantage of some things that small and mid-cap companies couldn't. One, in the
information technology area, was the ability to implement large, software-based
enterprisewide resource planning programs. These cost millions of dollars to
implement, but the payoff is even larger. Then, the follow-on benefits of the
technology trend -- in terms of productivity and customer service -- allowed
large companies to extend the period of profit margin improvement over a longer
time frame than many people originally thought.
LAMCO: That would suggest that smaller companies should be able to catch up as
they do some of their own restructuring. Is that your thought?
JOSTRAND: Yes, for small companies to improve their relative profit position
they need to take advantage of profit-enhancing technologies. Recently, we've
seen technology companies emerge and specifically address the small and mid-cap
market. That's an important catalyst.
[CALL OUT]
"I think the surprise in the `90s was that the booming stock market lasted as
long as it did."
[END CALLOUT]
LAMCO: What do you see as some other catalysts?
JOSTRAND: Let me answer that two ways. One is in the big cap area. Big cap
companies have taken advantage of their improved profitability to create
competitive advantage. They've used that as a base to consolidate positions
overseas through aggressive acquisition programs. To some extent, that has run
its course. Now, I think mid-cap companies are learning that's a strategy open
to them as well. For many years, mid-cap companies had grown primarily through
internal growth. That is, they would expand geographically, add new branches,
grow their sales force, introduce new product lines and so forth. The catalyst
we've been looking for among small and mid-cap companies is the development of
consolidation strategies and we see that happening.
A second factor is external to the companies themselves, and that is
diminished initial public offering (IPO) activity. IPO activity was very strong
in 1996 and `97, but began to decline last year and it remained below earlier
levels in the first quarter of 1999. The effect of a slower IPO market is that
there is less capital available for new companies to use to expand. The
diminished ability to grow will lead to less pricing pressure among the existing
competitors and should enhance profitability. If diminished capital availability
remains a factor -- as we think it will -- companies will be able to raise
margins.
LAMCO: A lot of IPOs were derailed by the soft stock market. But, you seem to be
saying that in spite of some headline-grabbing IPOs, the overall level of
activity is off?
[CALL OUT]
"We like the all-cap approach because it allows us to focus on a company's
business model and strategy."
[END CALLOUT]
JOSTRAND: We treat the less receptive IPO market as a positive. And, yes, there
have been some spectacular IPOs, especially anything with ".com" in its name,
but the overall pace is off.
LAMCO: This will be one of the last All-Star Growth Fund quarterly reports for
the decade, and it has been a truly remarkable period for equity investors.
Looking back, what lessons can investors take with them as we head into the next
millennium?
JOSTRAND: I think the surprise in the `90s was that the booming stock market
lasted as long as it did. Many people understood the notion that slowing
interest rates and inflation would have an overwhelmingly positive effect on the
market. But, the real surprise was that it lasted and continues to last. Another
lesson I've taken away is that change is the one constant. We began the decade
with the banking system under significant pressure and it turned out to be one
of the more impressive sectors in the stock market. The technology sector has
been a constant source of upheaval. We've even seen the basic belief in economic
cycles called into question. Some people think that the traditional broad based
economic recession cycle has gone by the boards. We've only had one significant
period in the last 15 years in which we've had back-to-back quarterly declines
in the GDP, and that was during the Operation Desert Storm military action, and
it coincided with a tax increase and the government's bail-out of the savings
and loan industry.
LAMCO: Do you believe the economic cycle is a thing of the past?
JOSTRAND: Two related thoughts on that subject. One is that housing and autos
are not the dominant sectors that they were 25 years ago. They are offset by
many more sectors that are vibrant and growing. Two, I think companies are less
susceptible to the interest rate cycle because they have been very aggressive in
managing inventories. Inventory-to-sales ratios have improved significantly.
With today's better information technologies, companies are able to better
manage inventories as soon as sales slow, or change the production mix to match
what
7
<PAGE>
MANAGER INTERVIEW
................................................................................
customers are buying. That said, I am sure that some other new challenge will
emerge, we're just not sure what it will be.
LAMCO: What role do you think the individual investor has played in all of this?
Certainly, equities are more widely held among American households than ever
before.
[CALLOUT]
"The most important factor for us is that we stay very close to our companies.
We do that through research and we've continued to grow our research staff."
[END CALLOUT]
JOSTRAND: With the "Baby Boomers" in their prime savings and investing years, I
think that's a phenomenon that lasts another 10 to 12 years. The interesting
parallel to that is individuals have proven, I think, to be much more
entrepreneurial than pension plan sponsors of 20 years ago. And, the fact that
individuals have asked for and gotten control over their retirement savings
through 401(k) plans is, I think, an important element, too. Most individuals
have shown an ability and willingness to establish risk/reward profiles that
they're comfortable with and that are built on a higher proportion of equities
in their portfolios than many pension plan sponsors would have committed to in
the past. That has been the right decision.
LAMCO: Let's shift to William Blair. Take us through the firm's strategy and
investment process.
JOSTRAND: Two points I'd like to make. The most important factor for us is that
we stay very close to our companies. We do that through research and we've
continued to grow our research staff. We're up over 35 now and we have plans to
add two more analysts this year. The other key point is that William Blair is an
employee-owned firm. There are now about 120 owners, and there is no major
single owner with a large bloc of control. The reason that's important is that
it leads to extremely low turnover among the professional staff. In the
portfolio management area, in fact, we have not had a portfolio manager leave
for a competitive situation in the last 10 to 12 years. We've had some
retirements, obviously, but no one has left for a competitive situation in that
period of time.
To carry that line of thought along a little farther, low turnover is
important because it lends credence to our philosophy of quality, consistent
growth. It gives investors some comfort that we'll continue to follow the
philosophy that we've articulated for ourselves. And, it has gone unchanged over
the entire 60 years the company has been in business.
LAMCO: You have a philosophy of quality, consistent growth, but you don't focus
on any one capitalization range, do you?
JOSTRAND: We do, in fact, have an all-cap philosophy. We like the all-cap
approach because it allows us to focus on a company's business model and
strategy. We tend to think of it as investing in "a slice of growth." We like
companies with a high degree of customer loyalty and retention. It could be a
retail chain whose customers visit three times a week or a uniform rental
company that's constantly interacting with its users. We think this is important
because it takes risk out of the business plan; in other words, we have a higher
degree of confidence in this type of company than one that must leap frog its
competitors to grow. For example, in many technology lines, you're only as good
as your last innovation, and with the product life cycle shortening to a matter
of months, you're constantly under pressure to come up with the next
breakthrough.
LAMCO: Define "a slice of growth" for us, please.
JOSTRAND: If you look at the universe of growth companies, many investment
managers slice it by size -- large, medium or small. If those are horizontal
cuts in the universe, we at William Blair tend to take a vertical cut, or a
vertical slice. That "slice" is defined by a business model whose primary
determinant is either quality or consistency, or both. And, as I said, the
elements in the business model that generate the most consistency are client
retention, pricing flexibility and moderate incremental investments in order to
maintain growth. It's that vertical slice of the growth universe that we think
makes for a natural blending of small, medium and large companies.
Two other points: This approach gives our analysts an ability to develop an
expertise in understanding business models of this type. And, just as
importantly, it allows us to invest in areas that are not necessarily obvious
growth sectors. Where we don't confine ourselves to some of the more obvious
growth categories, such as technology or health care.
[CALLOUT]
"... of the universe of growth companies ... we at William Blair tend to take a
vertical cut, or a vertical slice. That 'slice' is defined by a business model
whose primary determinant is either quality or consistency, or both."
[END CALLOUT]
LAMCO: We talked about consistency, let's talk about the quality issue.
Management is the key quality measure for you, isn't it?
JOSTRAND: Very much so. Management's ability to have a strong understanding of
its comparative advantage vis a vis competitors and an ability to create a
better value proposition for their customers are two factors that will cause
market share to shift. When shifts in market share occur, they allow one company
in a sector to grow more quickly than the others over a sustainable period of
time. That's purely management -- management's ability to define a set of
advantages,
8
<PAGE>
MANAGER INTERVIEW
................................................................................
goals and strategies and then get employees to buy into that vision and,
finally, motivate them to execute it well.
[CALLOUT]
"When shifts in market share occur, they allow one company in a sector to grow
more quickly than the others over a sustainable period of time."
[END CALLOUT]
LAMCO: Tell us about the portion of the All-Star Growth Fund portfolio that
you're managing.
JOSTRAND: One of the most important characteristics of companies in the Fund's
portfolio is profit margins. They're about one-third higher than the S&P 500
average. Our operating profit margins are in the low 20s versus about a 16 or 17
percent for the S&P 500. You won't see a better measure of quality than
management's ability to bring that sales dollar down to the bottom line. Now,
we're obviously a growth manager, so we're looking for superior long-term
growth. The very long-term growth rate for the S&P 500 is in the 7 to 8 percent
range. The changing mix of the S&P has brought that figure up into the low teens
over the past five years. What we're looking for is a growth rate that is higher
than that, more in the 17 to 18 percent range. And, we're also looking for
earnings consistency.
LAMCO: What are some specific holdings?
JOSTRAND: There are a number of long-term favorites in the portfolio because we
have that kind of an orientation and, as a result, our turnover tends to be
fairly low. One recent sale was Household International, the Chicago-based
consumer finance company. We sold it not because Household International made
any major mistake -- it's still a strong business -- but because we had
determined that the growth rate was beginning to slow significantly. The
slowdown came out of its credit card division, which is not only easing in
absolute terms but in relative terms compared to other leaders in the credit
card business. They acquired Beneficial Finance, and that gave Household
International a nice profit boost. However, we saw that coming to an end as
well. So, despite its strength, we felt that Household International didn't meet
our criteria going forward.
Interestingly, among our long-term favorites is a credit card company --
MBNA. It's continuing to grow at an above average rate and to add to
profitability not only above other credit card companies, but above other
corporate averages. MBNA is very focused on attracting customers. They want
customers who will roll balances and who have an average or better credit
profile. MBNA has a unique marketing program that has spurred good growth.
Finally, they've established themselves as the leader in an industry that is
still fairly fragmented.
Another stock that we're very pleased with is Texas Instruments. It's a
larger cap stock that has reaped the benefits of the restructuring that we
talked about earlier and has renewed its focus on core strengths. TI is also in
an area that is growing in that it makes electronic components and
microprocessors for unique applications that require real time processing.
Examples include wireless phone handsets and wireless base stations. TI has
about 50 percent of that market. Earlier, TI had shed many unrelated product
lines such as the electronic memory business, calculators and a defense
components business. That corporate renewal has been very energizing for the
remaining sectors, with profits growing strongly and market share improving.
LAMCO: You were talking earlier about William Blair's ability to find growth in
sectors where, at first glance, one might not expect to find it. Any examples of
that?
JOSTRAND: A great example is MSC Industrial Direct. MSC is a distributor of
industrial products, such as metal forming tools, grinders and similar products.
That's about as old tech as you can get. But this is a great example of
management focus along with a little bit of technology coming to bear on a
sector that could benefit from an improved level of service. MSC's key is
same-day order turnaround with next-day delivery in their trade areas. MSC runs
at about a 90 to 92 percent order fill rate versus an industry average about
half that. MSC also offers a huge number of products -- more than 360,000
catalog items. The company goes to market through an aggressive tele-sales
force, and has a large catalog as well as a number of specialty catalogs.
There's a little bit of a risk that the basic industry portion of the economy
slows down, but to us that's an opportunity to take advantage of a stock whose
valuation has improved because earnings have grown faster than has the price.
[CALLOUT]
"One of the most important characteristics of companies in the Fund's portfolio
is profit margins. They're about one-third higher than the S&P 500 average."
[END CALLOUT]
LAMCO: How many stocks are in the William Blair portfolio?
JOSTRAND: We have 36 names right now. We think that to earn a superior rate of
return with any philosophy, you need to have companies that you really believe
in. Thirty-six is less than the average manager, but we devote a lot of time to
research before we develop a high degree of confidence in a stock and add it to
the portfolio.
LAMCO: Thank you.
9
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1999 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (96.9%) SHARES MARKET VALUE
<S> <C> <C>
AEROSPACE & DEFENSE (1.6%)
Boeing Co. 40,000 $ 1,365,000
Lockheed Martin Corp. 45,000 1,695,937
-----------
3,060,937
-----------
AUTOS, TIRES, & ACCESSORIES (0.5%)
Superior Industries
International, Inc. 43,200 1,004,400
-----------
BANKS (5.2%)
Associated Banc-Corp 19,451 621,216
Bank United Corp., Class A 19,900 813,412
CCB Financial Corp. 16,100 870,406
Commercial Federal Corp. 25,500 591,281
Cullen/Frost Bankers, Inc. 15,064 722,130
Sovereign Bancorp, Inc. 53,400 654,150
State Street Corp. 24,800 2,038,250
TCF Financial Corp. 29,500 767,000
Webster Financial Corp. 30,000 866,250
Wells Fargo & Co. 50,000 1,753,125
-----------
9,697,220
-----------
BROADCASTING & CABLE (0.8%)
Cumulus Media, Inc.,
Class A (a) 50,000 587,500
Young Broadcasting,
Inc. (a) 20,736 946,080
-----------
1,533,580
-----------
BUSINESS & CONSUMER SERVICES (3.4%)
Cognos, Inc. (a) 60,100 1,412,350
Interim Services, Inc. (a) 22,200 333,000
Iron Mountain, Inc. (a) 30,635 957,344
National Data Corp. 29,600 1,243,200
Rental Service Corp. (a) 29,213 511,227
Robert Half International,
Inc. (a) 17,650 579,141
Shared Medical Systems
Corp. 23,100 1,286,381
-----------
6,322,643
-----------
CHEMICALS (3.7%)
Hanna (M.A.) Co. 48,721 624,238
Hercules, Inc. 25,000 631,250
Minerals Technologies, Inc. 52,690 2,529,120
Monsanto Co. 30,000 1,378,125
OM Group, Inc. 29,000 957,000
RPM, Inc. 54,000 718,875
-----------
6,838,608
-----------
COMMUNICATIONS EQUIPMENT (2.9%)
ADC Telecommunications,
Inc. (a) 24,100 1,149,269
Nokia Corp. ADR 25,000 3,893,750
Tekelec (a) 60,000 438,750
-----------
5,481,769
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
COMPUTER & BUSINESS EQUIPMENT (1.5%)
CFM Technologies, Inc. (a) 51,300 $ 371,925
Compaq Computer Corp. 30,000 950,625
SMART Modular
Technologies, Inc. (a) 64,914 969,653
Zebra Technologies Corp.,
Class A (a) 24,803 589,071
-----------
2,881,274
-----------
COMPUTER SERVICES & SOFTWARE (8.5%)
Acxiom Corp. (a) 66,900 1,772,850
Aspen Technology, Inc. (a) 84,801 1,203,114
Automatic Data
Processing, Inc. 80,000 3,310,000
Computer Associates
International, Inc. 30,000 1,066,875
Concord EFS, Inc. (a) 39,750 1,095,609
Cotelligent Group, Inc. (a) 33,000 292,875
Etec Systems, Inc. (a) 26,926 792,634
Microsoft Corp. (a) 26,400 2,366,100
QuadraMed Corp. (a) 42,600 324,825
SPSS, Inc. (a) 34,900 571,488
Sterling Commerce, Inc. (a) 49,500 1,522,125
SunGard Data Systems,
Inc. (a) 39,100 1,564,000
-----------
15,882,495
-----------
CONSUMER PRODUCTS (0.8%)
Blyth Industries, Inc. (a) 32,200 760,725
Philip Morris Companies,
Inc. 20,000 703,750
-----------
1,464,475
-----------
DIVERSIFIED (2.5%)
General Electric Co. 20,000 2,212,500
GSI Lumonics, Inc. (a)(b) 155,813 748,356
Minnesota Mining &
Manufacturing Co. 25,000 1,768,750
-----------
4,729,606
-----------
DRUGS & HEALTH CARE (8.9%)
American Oncology
Resources, Inc. (a) 64,500 580,500
Bard (C.R.), Inc. 25,000 1,260,937
Biomet, Inc. 45,000 1,887,187
Cardinal Health, Inc. 17,700 1,168,200
Covance, Inc. (a) 73,800 1,849,612
Curative Health Services,
Inc. (a) 15,500 178,250
DENTSPLY International,
Inc. 52,400 1,218,300
Elan Corp. ADR (a) 20,400 1,422,900
Hanger Orthopedic Group,
Inc. (a) 28,000 378,000
HEALTHSOUTH Corp. (a) 113,400 1,176,525
Maxxim Medical, Inc. (a) 34,045 642,599
</TABLE>
10 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1999 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
DRUGS & HEALTH CARE (CONT.)
Medtronic, Inc. 27,500 $ 1,973,125
Ocular Sciences, Inc. (a) 29,000 831,937
Omnicare, Inc. 53,400 1,017,937
Shire Pharmaceuticals Group
ADR (a) 50,302 1,147,514
-----------
16,733,523
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT (8.8%)
Analog Devices, Inc. (a) 20,133 598,957
Arrow Electronics, Inc. (a) 60,000 900,000
Burr-Brown Corp. (a) 30,926 726,761
Intel Corp. 29,100 3,466,538
Kulicke and Soffa
Industries, Inc. (a) 99,900 2,522,475
Linear Technology Corp. 31,400 1,609,250
Molex, Inc. 63,918 1,653,878
Photronics, Inc. (a) 65,183 1,214,033
PRI Automation, Inc. (a) 59,166 1,242,486
Texas Instruments, Inc. 25,800 2,560,650
-----------
16,495,028
-----------
FINANCIAL SERVICES (10.7%)
Citigroup, Inc. 90,000 5,748,750
Countrywide Credit
Industries, Inc. 55,000 2,062,500
Finova Group, Inc. 20,600 1,068,625
Freddie Mac 88,000 5,027,000
MBNA Corp. 84,750 2,023,406
Morgan Stanley Dean
Witter & Co. 25,000 2,498,438
Paychex, Inc. 22,500 1,067,344
UniCapital Corp. (a) 61,506 392,101
-----------
19,888,164
-----------
FOOD, BEVERAGE & RESTAURANTS (2.8%)
Brinker International,
Inc. (a) 20,700 534,319
Canandaigua Brands, Inc.,
Class A (a) 17,916 902,519
Diageo PLC ADR 30,000 1,372,500
Dole Food Co., Inc. 30,000 892,500
Performance Food Group
Co. (a) 35,378 928,673
Universal Foods Corp. 34,000 701,250
-----------
5,331,761
-----------
HOTELS & ENTERTAINMENT/LEISURE (1.8%)
Anchor Gaming (a) 15,900 695,625
Carnival Corp. 37,800 1,835,663
Royal Caribbean Cruises
Ltd. 23,300 908,700
-----------
3,439,988
-----------
INDUSTRIAL EQUIPMENT (3.7%)
Barnett, Inc. (a) 51,500 450,625
Caterpillar, Inc. 30,000 1,378,125
Dover Corp. 40,000 1,315,000
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
INDUSTRIAL EQUIPMENT (CONT.)
DT Industries, Inc. 50,500 $ 356,656
Illinois Tool Works, Inc. 25,100 1,553,063
MSC Industrial Direct Co.,
Inc. (a) 70,000 1,190,000
Watsco, Inc. 40,570 593,336
-----------
6,836,805
-----------
INSURANCE (7.9%)
ACE Ltd. 75,000 2,339,063
AFLAC, Inc. 65,000 3,538,438
American International
Group, Inc. 22,500 2,714,063
Conseco, Inc. 40,000 1,235,000
HCC Insurance Holdings,
Inc. 45,800 881,650
Progressive Corp. 12,000 1,722,000
XL Capital Ltd. 40,000 2,430,000
-----------
14,860,214
-----------
METALS & MINING (0.7%)
Freeport-McMoRan Copper
& Gold, Inc., Class B 40,000 435,000
Texas Industries, Inc. 34,000 843,625
-----------
1,278,625
-----------
OIL & GAS (2.0%)
BJ Services Co. (a) 35,000 820,313
Cooper Cameron Corp. (a) 39,000 1,321,125
Global Industries Ltd. (a) 80,000 810,000
Ocean Energy, Inc. (a) 107,179 730,157
-----------
3,681,595
-----------
PAPER (1.0%)
AptarGroup, Inc. 29,270 761,020
Bemis Co. 19,400 602,613
Consolidated Papers, Inc. 20,500 481,750
-----------
1,845,383
-----------
PUBLISHING (1.0%)
Applied Graphics Technologies,
Inc. (a) 39,991 299,933
R.R. Donnelley & Sons Co. 50,000 1,609,375
-----------
1,909,308
-----------
RETAIL TRADE (9.1%)
Borders Group, Inc. (a) 39,200 551,250
CDW Computer Centers,
Inc. (a) 9,900 683,100
CVS Corp. 40,000 1,900,000
Home Depot, Inc. 52,000 3,237,000
Lowe's Companies, Inc. 36,400 2,202,200
May Department Stores Co. 37,500 1,467,188
The Men's Wearhouse,
Inc. (a) 27,000 779,625
Office Depot, Inc. (a) 48,000 1,767,000
Staples, Inc. (a) 114,750 3,772,406
</TABLE>
See Notes to Schedule of Investments. 11
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1999 (UNAUDITED)
........................................................
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
RETAIL TRADE (CONT.)
Whitehall Jewellers,
Inc. (a) 38,700 $ 595,012
-----------
16,954,781
-----------
TELECOMMUNICATIONS (3.5%)
AirTouch Communications,
Inc. (a) 33,000 3,188,625
Sprint Corp. (FON Group) 35,000 3,434,375
-----------
6,623,000
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES MARKET VALUE
<S> <C> <C>
TRANSPORTATION (3.6%)
AMR Corp. (a) 40,000 $ 2,342,500
Eagle USA Airfreight,
Inc. (a) 22,000 715,000
Hub Group, Inc.,
Class A (a) 49,900 1,185,125
USFreightways Corp. 73,066 2,402,045
-----------
6,644,670
-----------
TOTAL COMMON STOCKS
(Cost $129,664,663) 181,419,852
-----------
</TABLE>
SHORT-TERM INVESTMENT (5.7%)
REPURCHASE AGREEMENT (5.7%)
<TABLE>
SBC Warburg Ltd., Repurchase Agreement dated 3/31/99, 4.90% to be repurchased at PAR
$10,640,448 on 4/1/99, collateralized by U.S. Treasury bonds and notes with VALUE
various maturities to 2019, with a current market value ============
<S> <C> <C>
of $10,889,456. $ 10,639,000 10,639,000
------------ -------------
TOTAL INVESTMENTS (102.6%) (Cost $140,303,663) 192,058,852
OTHER ASSETS & LIABILITIES, NET (-2.6%) (4,917,217)
-------------
NET ASSETS (100.0%) $187,141,635
=============
NET ASSET VALUE PER SHARE (15,236,351 SHARES OUTSTANDING) $12.28
=============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) This is a Canadian security. Share value is stated in U.S. dollars.
Gross unrealized appreciation and depreciation of investments at
March 31, 1999 is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $67,790,807
Gross unrealized depreciation (16,035,618)
------------
Net unrealized appreciation $51,755,189
============
</TABLE>
Acronym Name
------- ---------------------------
ADR American Depositary Receipt
12
<PAGE>
<TABLE>
<CAPTION>
PER SHARE CHANGES IN NET ASSETS / DISTRIBUTION POLICY / DIVIDEND REINVESTMENT PLAN
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1999 -----------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
PER SHARE CHANGES IN NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $13.03 $12.89 $11.27 $10.55 $ 9.95 $10.54
------ ------ ------ ------ ------- ------
Net investment income (loss) (0.01) (0.03) (0.02) 0.01 0.31 0.23
Distributions declared (0.31) (1.35) (1.24) (1.02) (0.76) (0.58)
Change due to rights offering (a) -- (0.21) -- -- -- --
Impact of shares issued in dividend
reinvestment (b) -- -- -- (0.13) -- --
Net realized and unrealized
gains (losses) on investments (0.43) 1.73 2.88 1.86 1.05 (0.24)
------ ------ ------ ------ ------- ------
Net asset value at end of period $12.28 $13.03 $12.89 $11.27 $ 10.55 $ 9.95
====== ====== ====== ====== ======= ======
</TABLE>
(a) Effect of Fund's rights offering for shares at a price below net asset
value.
(b)Effect of payment of a portion of distributions in newly issued shares valued
at a discount from net asset value.
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy, in effect since 1997, 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 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>
[Liberty Logo] LIBERTY ASG
ALL[STAR]STAR Listed
------------- NYSE
GROWTH FUND The New York Stock Exchange
A MEMBER OF THE
CLOSED-END
FUND
ASSOCIATION, INC.
WWW.CLOSED-ENDFUNDS.COM
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 c/o EquiServe
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
Internet: http://www.equiserve.com
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
DIRECTORS
Robert J. Birnbaum*
John V. Carberry
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
John V. Carberry, Chairman of the Board of Directors
William R. Parmentier, Jr., President and Chief Executive Officer
Christopher S. Carabell, Vice President
Mark T. Haley, Vice President
Timothy J. Jacoby, Treasurer
Nancy L. Conlin, Secretary
J. Kevin Connaughton, Controller
* Member of the audit committee.
- -----------------------------------------------------
Liberty Asset Management Company, the Fund's manager,
is one of the Liberty Financial Companies (NYSE: L).
[Liberty Logo] LIBERTY
FINANCIAL
FIRST
QUARTER
REPORT
1999
[Liberty Logo] LIBERTY
ALL[STAR]STAR
-------------
GROWTH FUND
