LIBERTY ALL STAR EQUITY FUND
Federal Reserve Plaza, Boston, Massachusetts 02210-2214
FUND MANAGER
Liberty Asset Management Company
One Financial Center, Boston, Massachusetts 02111-2621
1-617-772-7380
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
One Boston Place, Boston, Massachusetts 02108
INVESTOR ASSISTANCE
CUSTODIAN, TRANSFER AND DIVIDEND
DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND [1-800-542-3863]
LEGAL COUNSEL
Bingham, Dana & Gould
150 Federal Street, Boston, Massachusetts 02110
TRUSTEES
Robert J. Birnbaum*
James E. Grinnell*
Richard W. Lowry*
Richard I. Roberts
OFFICERS
Richard I. Roberts, Chairman, Board of Trustees
Richard R. Christensen, President
Peter L. Lydecker, Treasurer and Controller
John A. Benning, Secretary
New York Stock Exchange Trading Symbol: USA
*Member of the audit committee.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that the Fund may from time to time purchase
its shares of beneficial interest in the open market when the shares are
trading at a discount of 10 percent or more from their net asset value.
[LIBERTY LOGO]
Printed with Soybean Inks
[recycle symbol] Printed on Recycled Paper D/69M/8-95
[Liberty logo] LIBERTY
ALL STAR
EQUITY FUND
2
Semi-Annual Report
1995
<PAGE>
Semi-Annual Report
Chairman's Letter
Liberty ALL STAR Equity Fund
To Our Fellow Shareholders: July 1995
The net asset value (NAV) of a common share of ALL-STAR rose from $9.83 on
March 31, 1995 to $10.53 on June 30, 1995, after deducting the cash
distribution of 25 cents paid to shareholders during the quarter.
The market price of a share of ALL-STAR traded in a range from $9.375 to
$10.25 before closing the quarter at $10.00. The ending price represented a
discount to NAV of 5.0 percent, compared with a discount to NAV of 2.1
percent on March 31, 1995. Key investment results and comparisons are noted
in the two boxes.
Various factors in combination, including lower interest rates, strong
corporate profits and heavy cash flow into equity mutual funds, created a
very positive environment for common stock prices during the entire first
half of this year. In fact, the momentum strengthened during the period as
the second quarter somewhat out-performed the first.
ALL-STAR's performance benefited from this broad market strength. As the
boxes show, the Fund was up 9.8 percent in the second quarter and 19.5
percent for the six months, both comparing favorably with the Lipper Growth
and Income Mutual Fund Average (ALL-STAR's primary performance comparison),
the S&P 500 Stock Index and the Dow Jones Industrial Average. For
perspective, ALL-STAR's semi-annual result was the second best for such a
period in its eight and one-half year history.
Although there were some pundits who were bullish entering 1995, there were
at least as many with the opposite view. So the bulls have been correct thus
far. However, it is worth noting that while the longer term trend in common
stock prices is certainly upward, there have always been periodic
interruptive reactions against that trend. Following this recent significant
six-month advance, a bit of caution seems appropriate. Yet, having said that,
on balance investors seem to be optimistic going forward. Favorable
conditions are in place, and higher valuations have not been a significant
impediment to stock market progress. But probably a rather slower and more
nervous pace is in store.
The LAMCO Letter to Shareholders following discusses more about the
specifics of ALL-STAR's performance.
Ahead in this report is a Roundtable Discussion involving ALL-STAR's five
portfolio managers with particular focus on the better performing sectors.
Sincerely,
/s/ Richard I. Roberts
Richard I. Roberts,
Chairman
Board of Trustees
Liberty ALL-STAR Equity Fund
[boxed text]
Fund Performance for the second quarter and latest 6 months earned by
ALL-STAR's Portfolio Managers, after fees and expenses. Figures shown
are total returns, which include dividends and capital gains.
Second Latest
Quarter 6 Months
---------- -----------
ALL-STAR 9.8% 19.5%
Lipper Growth & Income Mutual Fund
Average 8.1% 16.6%
S&P 500 Stock Index 9.5% 20.2%
Dow Jones Industrial Average 10.2% 20.3%
ALL-STAR Closing Price Range 9-3/8--10-1/4 8-1/2--10-1/4
ALL-STAR Discount/Premium Range -8.4% to -8.7% to
-0.7% -0.7%
Investor Returns for the second quarter and latest 6 months earned by
ALL-STAR's shareholders, with distributions reinvested in shares
acquired from ALL-STAR at NAV or in the open market through the
Dividend Reinvestment Program.
Second Latest
Quarter 6 Months
---------- -----------
Shares Valued at Net Asset Value 9.8% 19.4%
Shares Valued at Market Price 6.5% 23.6%
[end boxed text]
1
<PAGE>
Semi-Annual Report
President's Letter
Liberty ALL STAR Equity Fund
To Our Fellow Shareholders: July 1995
As discussed in the preceding Chairman's letter, the stock market as a whole
and ALL-STAR in particular performed very well in the second quarter and the
first half of the year. As always, some sectors did better than others.
Technology and financial stocks continued to provide market leadership as a
slowing economy prompted investors to focus on better earnings visibility in
the technology sector and bank consolidation and declining interest rates in
the financial sector.
In previous letters, we have discussed how LAMCO's multi-management
investment approach, coupled with periodic rebalancing among managers, has
proven to be a successful investment strategy for a core equity portfolio. We
have not, however, elaborated on how specific investment styles influence
portfolio sector weightings, which is an important determinant of portfolio
performance. Sector analysis is accomplished by grouping stocks within an
index or portfolio on the basis of common characteristics.
The technology and financial sectors of the S&P 500 had returns of 23% and
12% respectively for the second quarter of the year, while ALL-STAR's returns
were 24% and 13% respectively. A stock portfolio's performance was
significantly impacted by the exposure to those groups due to their superior
returns relative to the overall market.
Throughout the second quarter, ALL-STAR's growth managers had a significant
overweighting in technology stocks while the value managers had an
overweighting in financial stocks. But LAMCO's approach of diversifying
investment styles resulted in a more balanced weighting of these two top
performing groups. The ALL-STAR portfolio still maintained an above-market
exposure to the two best performing sectors, but not to the extent that it
negatively impacted portfolio diversification. As a consequence, ALL-STAR had
a second quarter return of 9.8% (after fees and expenses), which exceeded
both the Lipper Growth & Income Average and the unmanaged S&P Index, which
gained 8.1% and 9.5% respectively.
While ALL-STAR will not always be overweighted in the two best performing
sectors, LAMCO's multi-management approach increases the likelihood of good
exposure to the best performing sectors while assuring that a particular
investment style or strategy does not favor a sector or group to the extent
that it dominates portfolio performance and, therefore, increases volatility.
We continue to believe our blending of styles and managers is sound and
important to achieving our twin objectives of better than average returns and
lower than average volatility.
Sincerely,
/s/ Richard R. Christensen
Richard R. Christensen
President,
Liberty ALL-STAR Equity Fund and
Liberty Asset Management Company
2
<PAGE>
Commentary
Managers' Differing Investment Styles
Are Reflected in Portfolio Characteristics
The Portfolio Characteristics table on this page is a regular feature of
ALL-STAR shareholder reports. It serves as a useful tool for understanding
the value of a multi-managed portfolio. The characteristics are different for
each of ALL-STAR's five investment managers. These differences are a
reflection of the fact that each pursues an individual Investment Style. The
shaded column highlights the characteristics of the ALL-STAR Fund, while the
final column shows portfolio characteristics for the entire S&P 500 Stock
Index.
The styles practiced by ALL-STAR's five investment managers are:
Cooke & Bieler, Inc./Value--
Companies with sound fundamentals: seasoned, well-managed and financially
strong.
Oppenheimer Capital/Value--
Contrarian holdings being overlooked and undervalued by investors.
Palley-Needelman Asset Management, Inc./Value--
Large capitalization companies with attractive valuations, sound fundamentals
and good prospects.
Columbus Circle Investors/Growth--
Companies whose growing earnings are not fully reflected in their share
prices.
Provident Investment Counsel, Inc./Growth--
Companies with fast growing earnings and bright prospects.
Portfolio Characteristics
as of
June 30, 1995
<TABLE>
<CAPTION>
VALUE STYLES GROWTH STYLES
----------------------------- ------------------
Cooke & Palley- Columbus Total S&P
Bieler Oppenheimer Needelman Circle Provident ALL-STAR 500 Index
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 1. Number of
Holdings 33 30 44 56 56 178 500
2. Percent in
Top Ten 45% 44% 28% 30% 39% 15% 18%
---------------------------------------------------------------------------------------------------------------
Size and 3. Average
Debt Sales or
Revenues
(billions) $12.7 $11.4 $19.4 $13.1 $9.1 $13.1 $22.3
4. Average
Debt/Capital
Ratio 23% 48% 38% 28% 30% 34% 33%
Profitability 5. Average
Return on Total
Capital 19% 14% 10% 14% 17% 15% 13%
6. Average
Return on
Equity 23% 21% 16% 20% 22% 20% 20%
Growth 7. Average
5-Year Sales
Per Share
Growth 7% 13% 5% 14% 20% 12% 9%
8. Average
5-Year Earnings
Per Share
Growth 11% 24% 22% 26% 30% 24% 19%
Yield 9. Dividend
Yield 3.0% 1.7% 2.8% 1.2% 0.6% 1.8% 2.5%
10. Average
5-Year
Dividend Payout
Ratio 53% 31% 48% 29% 14% 35% 46%
Valuation 11. Average
Price/Earnings
Ratio 16.4x 14.6x 14.5x 18.5x 24.6x 17.1x 16.1x
12. Average
Price/Book
Value Ratio 2.8x 2.5x 2.1x 3.0x 4.6x 2.8x 2.7x
---------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Major Stock Changes in the
Second Quarter
The following are the major ($2.5 million or more) stock changes--both
additions and reductions--that were made in ALL-STAR's portfolio during the
second quarter of 1995.
Shares
--------------------------------------------
Held
Name Additions Reductions 6-30-95
- ----------------------------------------------------------------------------
American Greetings Corp. 176,500 236,400
American International
Group, Inc. 26,300 56,300
American Stores Co. 100,000 100,000
Burlington Resources, Inc. 75,000 75,000
Champion International
Corp. 100,000 100,000
Cisco Systems, Inc. 84,000 84,000
Philips Electronics N.V. 70,000 70,000
Texas Instruments, Inc. 26,400 44,700
Union Pacific Corp. 70,000 70,000
Alza Corp. (135,000) 0
AMP, Inc. (90,000) 72,400
The Boeing Co. (59,700) 92,000
The Coca-Cola Co. (58,000) 0
Fluor Corp. (55,000) 0
Fruit of the Loom, Inc. (150,000) 0
Hewlett-Packard Co.* (91,000) 65,000
Home Depot Inc. (113,700) 85,700
PepsiCo, Inc. (83,200) 102,400
Pioneer Hi-Bred
International, Inc. (65,300) 38,000
Polaroid Corp. (77,000) 33,000
Sigma-Aldrich Corp. (68,500) 0
U.S. Healthcare, Inc. (203,175) 0
United Healthcare Corp. (114,400) 80,000
UNUM Corp. (100,000) 0
*Adjusted for stock split
Shareholders'
Investment Growth
A report on per-share
values, distributions and
reinvestment since
ALL-STAR's inception
Since its inception, ALL-STAR has maintained an optional Automatic Dividend
Reinvestment and Cash Repurchase Plan, whereby distributions are
automatically used to acquire additional shares of ALL-STAR. In addition,
three rights offerings have allowed investors to acquire additional shares.
The rights offering in April 1992 allowed investors to acquire one share at
$10.05 for every ten shares held, the one in October 1993 allowed investors
to acquire one share at $10.41 for every 15 shares held; and the one in
September 1994 allowed investors to acquire one share at $9.14 for every 15
shares held.
As the graph on the facing page shows, an original share, including the
rights offering and dividend reinvestment shares, has grown to a net asset
value of $32.65 (3.10 shares times the current $10.53 net asset value per
share) and a market price value of $31.01 (3.10 times $10.00). Excluding the
rights offering shares, an original share has grown to 2.51 shares. Thus, the
original share has grown to a net asset value of $26.47 (2.51 shares times
the current $10.53 net asset value per share) and a market price value of
$25.14 (2.51 times $10.00).
Long-Term Investment
Performance Update
[boxed text]
Annualized through June 30, 1995
1 Year 3 Years 5 Years
------- ------- ---------
ALL-STAR 23.5% 12.6% 13.0%
ALL-STAR
(Distributions Reinvested) 23.8% 12.6% 13.3%
Lipper Growth & Income
Mutual Fund Average 19.6% 11.7% 10.9%
Standard & Poor's
500 Stock Index 26.0% 13.2% 12.1%
Dow Jones
Industrial Average 29.0% 14.3% 13.0%
[end boxed text]
4
<PAGE>
[Graph-Growth in value of a Share]
<TABLE>
<CAPTION>
NAV(1) Price
Shares Shares Shares Shares Per Total Per
Owned at Per Purchased Acquired Owned Share NAV Share Total
Beginning Share Through Through at End at End of at End Price
of Distri- Reinvestment Rights of of Shares of Shares
Year Period butions Program Offering Period Period Owned Period Owned
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1.00 $1.18 .14 -- 1.14 $ 7.90 $ 9.01 6 $ 6.85
--------------------------------------------------------------------------------------------------------------------
1988 1.14 $0.64 .11 -- 1.25 $ 8.29 $10.33 7-1/4 $ 9.04
--------------------------------------------------------------------------------------------------------------------
1989 1.25 $0.95 .16 -- 1.40 $ 9.58 $13.43 8-1/4 $11.57
--------------------------------------------------------------------------------------------------------------------
1990 1.40 $0.90 .17 -- 1.57 $ 8.92 $13.99 7-3/4 $12.16
--------------------------------------------------------------------------------------------------------------------
1991 1.57 $1.02 .17 -- 1.74 $11.20 $19.49 10-3/4 $18.71
--------------------------------------------------------------------------------------------------------------------
1992 1.74 $1.07 .20 .18(2) 2.12 $10.78 $22.81 11-1/8 $23.54
--------------------------------------------------------------------------------------------------------------------
1993 2.12 $1.25(5) .25 .14(3) 2.52 $10.40 $26.20 11-1/8 $28.03
--------------------------------------------------------------------------------------------------------------------
1994 2.52 $1.00 .28 .16(4) 2.95 $ 9.26 $27.34 8-1/2 $25.09
--------------------------------------------------------------------------------------------------------------------
1995
1st Quarter 2.95 $0.24 .07 -- 3.03 $ 9.83 $29.74 9-5/8 $29.12
2nd Quarter 3.03 $0.25 .08 -- 3.10 $10.53 $32.65 10 $31.01
--------------------------------------------------------------------------------------------------------------------
</TABLE>
1) Net Asset Value
2) Rights offering completed in April 1992. One share offered at $10.05 for
every 10 shares owned.
3) Rights offering completed in October 1993. One share offered at $10.41 for
every 15 shares owned.
4) Rights offering completed in September 1994. One share offered at $9.14
for every 15 shares owned.
5) Includes the $0.18 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end price of 11-1/8.
5
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Top 50
Holdings
As of
June 30, 1995
<TABLE>
<CAPTION>
Rank
as of Value % of
Rank 3/31/95 Security Name ($000) Net Assets
- ----- ------- ------------------------------------------ ------- -----------
<S> <C> <C> <C> <C>
1 2 Intel Corp. 18,601 2.3%
2 1 Royal Dutch Petroleum Co. 13,772 1.7%
3 14 Citicorp 12,738 1.6%
4 11 Microsoft Corp. 11,604 1.4%
5 6 Capital Cities/ABC Inc. 11,178 1.4%
6 4 May Department Stores Co. 10,406 1.3%
7 15 Monsanto Company 10,202 1.3%
8 8 Avon Products, Inc. 10,164 1.3%
9 5 Motorola, Inc. 10,069 1.2%
10 19 Oracle Systems Corp. 9,759 1.2%
11 3 International Business Machines Corp. 9,696 1.2%
12 21 Ericsson (L.M.) Telefonaktiebolaget ADR
Class B 9,264 1.1%
13 24 McDonnell Douglas Corp. 9,210 1.1%
14 41 Nokia Corp. ADR 9,182 1.1%
15 17 Federal Home Loan Mortgage Corp. 8,800 1.1%
16 26 Raytheon Co. 7,840 1.0%
17 18 Marsh & McLennan Companies, Inc. 7,464 0.9%
18 22 Procter & Gamble Co. 7,374 0.9%
19 31 Merck & Co., Inc. 7,350 0.9%
20 28 Medtronic Inc. 7,203 0.9%
21 30 Union Camp Corp. 7,194 0.9%
22 39 Applied Materials, Inc. 7,121 0.9%
23 25 Exxon Corp. 7,063 0.9%
24 51 SmithKline Beecham PLC ADR 6,982 0.9%
25 38 Triton Energy Corp. 6,956 0.9%
26 146 American Greetings Corp. 6,944 0.9%
27 29 Readers Digest Association Inc. Class A 6,707 0.8%
28 45 Browning-Ferris Industries Inc. 6,622 0.8%
29 23 Dover Corp. 6,620 0.8%
30 27 Unilever N.V. 6,506 0.8%
31 43 EXEL Limited 6,500 0.8%
32 49 Computer Associates International, Inc. 6,497 0.8%
33 110 American International Group, Inc. 6,418 0.8%
34 36 First Data Corp. 6,381 0.8%
35 16 General Electric Co. 6,246 0.8%
36 48 Arrow Electronics Inc. 6,219 0.8%
37 42 AFLAC Inc. 6,125 0.8%
38 34 The Gillette Co. 6,123 0.8%
39 46 Warnaco Group Inc. Class A 6,000 0.7%
40 152 Texas Instruments, Inc. 5,984 0.7%
41 47 Sprint Corp. 5,884 0.7%
42 37 The Dun & Bradstreet Corp. 5,775 0.7%
43 13 The Boeing Co. 5,762 0.7%
44 65 Morgan Stanley Group, Inc. 5,670 0.7%
45 92 Eastman Kodak Co. 5,505 0.7%
46 40 Progressive Corp. 5,373 0.7%
47 53 State Street Boston Corp. 5,347 0.7%
48 127 Bank of New York, Inc. 5,253 0.6%
49 33 Pacific Telesis Group 5,216 0.6%
50 NEW Champion International Corp. 5,213 0.6%
</TABLE>
6
<PAGE>
ALL STAR
Manager Roundtable
Value and Growth: Looking at the Stock Market from Different Perspectives
Investors constantly develop different scenarios for the stock market and can
make a case for any and all of these scenarios. But the strong first half may
have had the effect of raising more questions about the stock market than it
answered. To analyze both the past and future--and to gain some insights into
current holdings in the ALL-STAR portfolio--the fund manager, Liberty Asset
Management Company, recently asked ALL-STAR's five portfolio managers to
share their views.
The managers and their investment styles are:
Columbus Circle Investors
Portfolio Manager:
Irwin Smith, Chairman
Investment Style: Growth--
Columbus Circle invests in companies whose earnings growth has accelerated
and is anticipated to continue accelerating beyond consensus expectations.
Stock selection focuses on identifying the critical micro and macro factors
underlying the fundamental expectations for each company.
Cooke & Bieler, Inc.
Portfolio Manager:
James C.A. McClennen, Senior Partner and Director
Investment Style: Value--
Cooke & Bieler invests primarily in the stocks of well managed companies
which are industry leaders and are characterized by sound finances and high
profitability. Consistency and predictability of earnings and dividend growth
are highly prized. Intense fundamental analysis is performed on all potential
portfolio holdings.
Oppenheimer Capital
Portfolio Manager:
John G. Lindenthal,
Managing Director
Investment Style: Value--
Oppenheimer invests in the stocks of quality companies with sound business
prospects that are considered undervalued because they are currently disliked
or are being overlooked by investors. Research focuses on cash flow analysis.
Purchase candidates exhibit a high return on equity, large undedicated cash
flow, and reasonable prices in relation to book value.
Palley-Needelman Asset
Management, Inc.
Portfolio Manager:
Roger B. Palley, President
Investment Style: Value--
Palley-Needelman invests in the stocks of companies which it believes are
selling at a substantial discount to their intrinsic value and where a
"catalyst" exists which will lead to a realization by the market of this true
value. Stocks must pay a dividend, have a market capitalization of at least
$1 billion and are characterized by below-market price/earnings, price/cash
flow and debt/capital ratios.
Provident Investment
Counsel, Inc.
Portfolio Manager:
Jeffrey J. Miller,
Managing Director
Investment Style: Growth--
Provident invests in the stocks of companies that are expected to provide
fast growth in earnings. Provident believes that companies with superior
financial characteristics and accelerating sales and profit growth will
provide superior stock returns. Stocks held typically have high profit
margins and return on equity and price/earnings ratios less than their
predicted growth rates.
LAMCO: Let's discuss the stock market's extraordinary return in the first
half of the year. Roger Palley, will you please start?
Palley (Palley-Needelman, Value): A combination of strong earnings growth,
lower interest rates and favorable supply/demand conditions paved the way to
another strong quarter for the stock market. Almost 60 percent of the
companies in the S&P 500 reported first quarter earnings that were higher
than consensus forecasts. Thirty-year
Continued on page 8
7
<PAGE>
Continued from page 7
Treasury bonds began the year yielding 7.88% and rose in price to yield 7.43%
at the end of the first quarter and 6.62% at the end of the second. Equity
demand was buoyed by a record $58 billion in corporate stock buybacks for the
first half compared with $68 billion for all of 1994, and equity mutual funds
continued to experience strong cash inflows.
While the market's gain has been due to strong fundamentals, it has been more
narrowly focused than we would like. Technology was the driving force during
the quarter, with three of the top five performing S&P industry groups in
this sector. Technology stocks in general appear to be overextended and a
correction in this sector could lead to an overall stock market correction in
the second half.
The good fundamentals also came against a backdrop of pessimism and
relatively high cash levels coming into 1995, which helped to propel the
market. This has given way to more complacency and less ready cash. The stock
market could simply "run out of fuel" for awhile, resulting in a short-term
pull-back.
LAMCO: Let's hear from the other two Value managers, Jim McClennen and John
Lindenthal.
McClennen (Cooke & Bieler, Value): Our reaction to the stock market's
performance during the second quarter is mixed. Given that interest rates
have declined steadily this year, we are not surprised that stocks have done
well. We are, however, surprised by the extraordinary strength of the stock
market and believe that it reflects an increasingly speculative environment.
I say this for several reasons. First, going into 1995, we believed the stock
market was high relative to historical valuation measures, such as price/
earnings ratio, price/sales ratio and dividend yield. We recognize that the
stock market can remain in "high" territory for extended periods of time, but
an explosive move from a high level seems unusual. Second, the U.S. economy
has shown signs of weakness during the course of the year. It is clear to us
that signs of a slowing economy would have a positive effect on interest
rates, but the impact on the stock market is less clear. While declining
interest rates certainly help stock prices, the prospect of a slowing economy
would, at some point, seem to deflate earnings expectations, which would
adversely affect stock prices. Because the latter has not occurred, investors
must be assuming that economic growth will not recede. A "soft landing" would
present an ideal environment for investing, but has historically been a rare
occurrence. Finally, technology-related stocks continue to lead the market's
advance, a trend that has been in place since the end of 1990. During the
first half of the year the average Science & Technology fund was up almost
28%, according to Lipper Analytical Services. A market that is led by a group
characterized by relatively high price/earnings ratios, low
[callouts]
...............................................................................
'While the market's gain has been due to strong fundamentals, it has been
more narrowly focused than we would like. Technology was the driving force
during the quarter. . .'
--Roger Palley (Palley-Needelman, Value)
...............................................................................
...............................................................................
'Given that interest rates have declined steadily this year, we are not
surprised that stocks have done well.'
--Jim McClennen (Cooke & Bieler, Value)
..............................................................................
8
<PAGE>
ALL STAR
yields and high growth expectations is speculative, in our opinion.
Lindenthal (Oppenheimer--Value): The stock market's second quarter
performance was not surprising given the drop in interest rates, weakening
credit demands and the rise in corporate profits. Also, heavy cash flows into
mutual funds--averaging about $2 billion a week--put pressure on managers to
buy stocks. Financial stocks rose sharply in response to lower interest rates
and technology stocks became hot as the information revolution became more
apparent to investors.
LAMCO: Now, let's turn to the Growth managers and hear their point of view.
Jeff Miller, what do you think?
Miller (Provident--Growth): The overall stock market's move in the second
quarter has been both impressive and surprising as far as I am concerned. If
you would have asked me several years ago what our overall expectations were,
I would have expected that it would be a very difficult environment for the
overall stock market, after the very rewarding decade of the '80s. We
expected that the decade of the '90s would show a regression-to-the-mean type
of pattern. This has not been the case. The stock market was very strong in
1991, and during the first six months of 1995 it is up more than 20 percent.
I think the drivers so far this year have been falling interest rates and
greater acceptance of the "soft landing" scenario, as opposed to a
recessionary environment. Last year, the market appeared more concerned about
an overheated economy, rising interest rates and higher inflation. That fear
is clearly gone from the stock market at this stage, I believe.
Technology is another major driver of the market, and I think much of the
reason for the strong performance from the technology sector is because of
very strong earnings. This is a trend that I think can continue in an
economic environment characterized by a soft landing.
Smith (Columbus Circle--Growth): It was a surprisingly strong and selective
stock market, with the performance of technology far outpacing other sectors.
In looking at the S&P 500 Index, technology returned 23 percent for the
quarter and the only other sector to meaningfully beat the index was finance,
at a 12 percent return, and it had the benefit of being spurred by takeovers
or takeover rumors. The top eight performing technology stocks in the S&P 500
all returned over 40 percent for the period; five were in the semiconductor
business and the other three dealt in telecommunications equipment. Positive
momentum in orders and revenues coupled with positive earnings surprises were
so prevalent in these and other technology subsectors that we could have had
an even higher concentration in the ALL-STAR portfolio which would have led
to higher returns, but we would have had to give up sufficient levels of
diversification.
The rapidity with which the stock market moved to higher levels seemed to
lead to
Continued on page 10
[callouts]
...............................................................................
'The stock market's second quarter performance was not surprising given the
drop in interest rates, weakening credit demands and the rise in corporate
profits.'
--John Lindenthal (Oppenheimer, Value)
...............................................................................
...............................................................................
'We expected that the decade of the '90s would show a regression-to-the-mean
type of pattern. This has not been the case.'
--Jeff Miller (Provident, Growth)
...............................................................................
9
<PAGE>
Continued from page 9
higher levels of worry--clearly, recognition that volatility is a two-way
street. Economic data is still somewhat borderline and the sustainability of
earnings is not quite proven. Coupled with the concentration of winners in
the stock market, this leaves the investor "cautiously" aggressive.
LAMCO: Let's turn to a look at the ALL-STAR portfolio by discussing a few of
ALL-STAR's better performing stocks for the quarter. Irwin Smith, please
continue.
Smith (Columbus Circle--Growth): Portfolio holdings in Citicorp returned more
than 36 percent in the second quarter. Still the largest bank holding company
in the United States, Citicorp is experiencing strong growth in revenue from
its expanding global consumer banking operations, especially in emerging
market countries. Its domestic and international bankcard business have had
good growth, which has translated to good profitability. With continued
emphasis on cost control, a strong balance sheet and an increasing global
consumer business, Citicorp should have further positive potential.
Up more than 29 percent for the period, shares of Ericsson
Telecommunications, a leading worldwide wireless equipment manufacturer,
benefited from the company's improvement in market share and margin
expansion. As network buildouts in the U.S. and international markets
continue to occur more and more rapidly, Ericsson, with its established
international presence and growing U.S. market share, should continue its
momentum.
In the strong technology sector, Applied Materials Corp., the world's largest
producer of fabrication systems for manufacturers of semiconductors, was one
of the big winners in the portfolio, up 57 percent for the quarter. The end
does not seem to be near, given the greater consumer penetration of personal
computers, the rapidly increasing upgrade cycle for semiconductors and the
proliferation of new uses and devices requiring more power and capacity. With
worldwide growth trends in semiconductors exceeding 20 percent annually,
there should also occur a similar acceleration in the purchase of
semiconductor manufacturing equipment. Not surprisingly, Applied Materials
should continue to be a major beneficiary of this strong secular trend.
LAMCO: Jeff Miller, what were your better performers?
Miller (Provident--Growth): As would be expected, performance in the second
quarter was dominated by the exceptional returns in the technology area. Our
larger holdings, making significant contributions, included Microsoft, which
was up 27 percent; Intel, up 49 percent; Nokia, up 63 percent; and Oracle, up
24 percent. Like Columbus Circle, we also hold Applied Materials, which rose
57 percent, and Ericsson, which posted a 29 percent gain. I believe all of
these companies are benefiting from a very high rate of growth in earnings,
and that in slower economic environment, that stands out significantly
relative to the overall market.
LAMCO: On the Value side, can you tell us about some of the strong
performers, John Lindenthal?
Lindenthal (Oppenheimer--Value): Our largest holding, McDonnell Douglas, was
up 38 percent and continues to restructure its defense and commercial airline
business while generating substantial amounts of free cash flow.
Our best performing stocks in the quarter were in the technology area. Nokia
[callout]
...............................................................................
'The top eight performing technology stocks in the S&P 500 all returned over
40 percent in the second quarter.'
--Irwin Smith (Columbus Circle, Growth)
...............................................................................
10
<PAGE>
ALL STAR
(+ 63 percent) is based in Helsinki, Finland, and produces wireless
communications equipment and cellular phones. Intel (+ 49 percent) is well
known for its dominant market share (85 percent) of the worldwide
microprocessor market. Arrow Electronics (+ 18 percent) is the largest
distributor of semiconductors and shareholders have benefited by their astute
acquisitions on a global basis.
Substantial holdings in financial services companies also contributed to our
outperformance during the quarter. These included Citicorp (+ 36 percent),
Exel Ltd. (+ 18 percent), Morgan Stanley (+ 21 percent) and Federal Home Loan
Mortgage Corp. (+ 14 percent). Investments in these companies during the past
few years were not an interest rate play, but were based on exceptional
opportunities in terms of growth and high returns on capital, combined with
reasonable market valuations.
Palley (Palley-Needelman--Value): The stock of IBM climbed by about 17
percent during the quarter due to significantly improved fundamentals. The
company reported record second quarter earnings of $2.97 per share compared
to $1.14 in the second quarter of last year, and first half earnings of $5.09
versus $1.68 last year. Margins benefited from higher volume and improved
mix, along with continued expense control. We think the recent acquisition of
Lotus will be a long-term positive as its communications business--
particularly Lotus Notes--and desktop applications fill important niches for
IBM. Lou Gerstner and his team appear to be delivering as we expected.
Philips Electronics was added to the portfolio in late May and has increased
in price by more than 30 percent since then. Based in the Netherlands, it is
the second largest electronics company in the world. Its products
include light bulbs, VCRs, televisions and electronic components as well as
the 75 percent-owned Polygram entertainment unit, which has interests in
music, television and film programming. Almost 30 percent of earnings are
derived from semiconductor sales. Excellent new management was brought in
during 1990 and has transformed this once "sleepy" giant into an extremely
competitive company. The repositioning continues while the stock still sells
for less than 10 times earnings and only 1-1/2 times book value.
Monsanto, which gained more than 13 percent for the quarter, is one of the
world's largest chemical companies. Its principal businesses include bulk
chemicals, agricultural chemicals and pharmaceuticals through its G.D. Searle
unit. A positive catalyst occurred when Robert Shapiro took over as chairman
last March. Shapiro has a reputation of getting results and is expected to
increase the company's focus on cost reduction and leveraging new products
from existing strong franchises. The company recently won the required
approvals to commercialize the first two of a series of plant biotechnology
products that should contribute significantly to sales and earnings.
LAMCO: How do you see events unfolding in the second half of the year for the
stock market? Jeff Miller, will you lead off?
Miller (Provident--Growth): That's a tough question. After seeing such a
strong return in the first half, I would draw some parallels to the 1989,
1990 and 1991 stock markets.
[callout]
...............................................................................
'For the second half of the year, the
expectations of the majority now favor renewed growth, although there is a
significant group that believes a recession is most likely.'
--Irwin Smith (Columbus Circle, Growth)
...............................................................................
Continued on page 12
11
<PAGE>
Continued from page 11
These were environments where we also saw a slowdown in the economy. In 1989,
the S&P was up 7 percent in the first quarter and almost 9 percent in the
second quarter, similar to what we've seen this year. In the second half of
that year, the market was up approximately 13 percent to finish the year at
up more than 31 percent. I believe that if we continue to see stable rates of
inflation and slightly declining interest rates, that type of return would be
a possibility . . . though I quickly point out market forecasting is a very
hazardous business.
I would also point out that we should not ignore that a stock market
correction is a possibility. It is rare that we see the stock market go up as
strong and as long as we have without some sort of correction.
LAMCO: Irwin Smith, please discuss Columbus Circle's viewpoint?
Smith (Columbus Circle--Growth): The second quarter's economic data showed
evidence of a significant slowdown in the economy from the fourth quarter of
1994. The consensus forecast for the quarter's growth is now - 0.5 percent to
+1.5 percent. For the second half of the year, the expectations of the
majority now favor renewed growth, although there is a significant group that
believes a recession is most likely.
It appears that we have achieved a "soft landing" and that the Federal
Reserve Board has reversed its tightening policy. If, as many investors
expect, the Fed adopts an active policy of easing, the equity market should
continue to chase new highs despite some concerns about lower earnings and
profit margins translating into lower stock prices.
Going forward, we expect to continue to find more positive momentum and
positive surprise in the technology and healthcare sectors than in such
sectors as consumer durables or producer durables. Accordingly, we will
continue to hold overweighted positions in technology and healthcare and
underweight in consumer staples and producer durables. The relative exposure
to consumer staples versus more cyclical stocks will depend on domestic and
international developments relative to expectations.
LAMCO: Jim McClennen, what is the view at Cooke & Bieler?
McClennen (Cooke & Bieler, Value): As I said earlier, we thought the stock
market was high going into 1994. Though the interest rate environment has
improved, we do not think that underlying fundamentals have changed
significantly. Thus, it appears to us, based on traditional valuation
measures, that the stock market remains in "high" territory. There would now
seem to be a greater likelihood that the stock market will be volatile and
choppy in the second half of the year, given that the market is now more than
20 percent higher than it was just six months ago. Additionally, given the
high level of the stock market, evidence of a material slowing of the economy
could lead to an unusually volatile period. We believe that the appropriate
investment posture is one of caution in light of high valuations, high
investor expectations and a strong stock market.
LAMCO: John Lindenthal, please comment, and then Roger Palley give us your
comments to end the discussion.
Lindenthal (Oppenheimer--Value): The key question for the second half is
whether the market already discounts generally favorable economic
circumstances and whether it has given adequate consideration to potential
risks and
[callout]
...............................................................................
'There would now seem to be a greater likelihood that the stock market will
be volatile and choppy in the second half of the year...'
--Jim McClennen (Cooke & Bieler, Value)
...............................................................................
12
<PAGE>
ALL STAR
negatives. Historically, markets have not declined simply because of high
valuations. But enriched levels do make markets vulnerable to financial
shocks, which by definition are unpredictable.
If current levels of corporate profitability are sustainable (aided by cost
reduction and restructuring), then the current price/earnings ratio of 16X
trailing 12-month earnings for the S&P 500 Index is not an unreasonably high
valuation.
Supply/demand factors for equities also appear essentially positive. Net
flows into mutual funds together with ongoing corporate repurchase programs
bode well for stock prices.
Palley (Palley-Needelman, Value): While a correction in technology stocks
could be a market factor during the second half of 1995, broad-based
diversification in our portfolio should dampen such a decline. We have
achieved returns in line with the S&P 500 so far this year with very little
exposure to high-flying technology stocks. We believe overall stock market
fundamentals are still strong, however, and would view any correction as a
buying opportunity.
We enter the second half with the Fed reversing directions--lowering the Fed
funds rate 25 basis points to 5.75 percent. This should be a positive
catalyst for equities over the coming months since further easing is likely.
No easing process has ever stopped after 25 basis points; in fact, once
started, the Fed has never eased by less than 75 basis points. The Fed also
has room to ease further just to take policy in neutral territory. With
inflation currently running at about 3 percent, the Fed funds rate is roughly
275 basis points above that level. That compares with a long-term average
spread of about 175 basis points.
Another key factor for equities during the second half will be the rate of
corporate earnings growth. Growth is likely to slow from here, but still be
positive in 1995 and 1996. Most estimates have operating earnings for the S&P
500 at about $35.50 for 1995 and $38.00 for 1996, which at its current level
of 559 would equate to a price/ earnings ratio of 15.7 and 14.7,
respectively. The stock market is already starting to look at 1996 earnings,
and this level would not indicate much overvaluation. The earnings gains,
however, will not be evenly spread, as certain industries and stocks will be
favored. The more important issue then becomes how best to structure the
portfolio to reflect economic trends.
We think the large, multinational companies will generally show better
earnings growth due to rapidly expanding economies in the Far East and
recovery in Europe. The current low level of the dollar will continue to give
these companies a com-
[callouts]
Continued on page 14
...............................................................................
'If current levels of corporate profitability are sustainable, then the
current price/earnings ratio of 16X trailing 12-month earnings for the S&P
500 Index is not an unreasonably high valuation.'
--John Lindenthal (Oppenheimer, Value)
...............................................................................
...............................................................................
'We believe overall stock market fundamentals are still strong, and would
view any correction as a buying opportunity.'
--Roger Palley (Palley-Needelman, Value)
...............................................................................
13
<PAGE>
Continued from page 13
petitive advantage. We have good exposure in this area via a number of
U.S.-based multinationals and several ADRs.
We are also focusing on companies that have successfully embarked on
restructuring programs to reduce costs and improve productivity, leading to
better bottom-line growth. As to specific industries, an environment of
declining interest rates with a low probability of recession should favor
certain cyclical stocks that are still bargains, including auto and housing-
related issues. The regional banks are generally selling at low multiples and
should also benefit from lower rates. [star]
[boxed text]
Dividend Reinvestment Plan
Through ALL-STAR's Automatic Dividend Reinvestment and Cash Purchase
Plan, ALL-STAR shareholders have the opportunity to have their dividends and
distributions automatically reinvested in additional shares of the Fund.
Participating shareholders are kept apprised of the status of their account
through quarterly statements.
For complete information and enrollment forms, please call Investor
Assistance toll-free at 800-LIB-FUND (800-542-3863) weekdays between 9 AM and
5 PM Eastern time.
[end boxed text]
14
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Schedule of
Investments
as of
June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Common Stocks (96.6%) Shares Market Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Aerospace (1.9%)
The Boeing Co. 92,000 $ 5,761,500
McDonnell Douglas Corp. 120,000 9,210,000
-------------
14,971,500
-------------
Auto Manufacturing (0.5%)
General Motors Corp. 95,000 4,453,125
-------------
Auto Parts (0.6%)
Genuine Parts Co. 130,300 4,935,112
-------------
Banks (4.7%)
Ahmanson (H.F.) & Co. 139,100 3,060,200
Bank of New York, Inc. 130,100 5,252,786
Citicorp 220,100 12,738,288
CoreStates Financial Corp. 120,000 4,185,000
Great Western Financial Corp. 72,000 1,485,000
Shawmut National Corp. 100,000 3,187,500
State Street Boston Corp. 145,000 5,346,875
Wachovia Corp. 70,000 2,502,500
-------------
37,758,149
-------------
Broadcasting & Cable (2.1%)
British Sky Broadcasting Group PLC ADS (a) 60,000 1,567,500
Cabletron Systems Incorporated (a) 40,000 2,130,000
Capital Cities/ABC, Inc. 103,500 11,178,000
Viacom, Inc. (a) 53,200 2,467,150
-------------
17,342,650
-------------
Business Services (2.1%)
The Dun & Bradstreet Corp. 110,000 5,775,000
First Data Corp. 112,200 6,381,375
First Financial Management Corp. 56,200 4,805,100
-------------
16,961,475
-------------
Chemicals (2.3%)
The Lubrizol Corp. 108,000 3,820,500
Monsanto Co. 113,200 10,202,150
Sherwin-Williams Co. 124,000 4,417,500
-------------
18,440,150
-------------
Computers & Business Equipment (12.8%)
Applied Materials, Inc. (a) 82,200 7,120,575
Automatic Data Processing, Inc. 50,000 3,143,750
Cisco Systems, Inc. (a) 84,000 4,247,250
Computer Associates International, Inc. 95,900 6,497,225
Computer Sciences Corp. (a) 40,000 2,275,000
Digital Equipment Corp. (a) 32,800 1,336,600
EMC Corp. (a) 52,700 1,277,975
General Motors Corp. Class E 72,700 3,162,450
15
<PAGE>
Common Stocks (continued) Shares Market Value
- --------------------------------------------------------------------------
Computers & Business Equipment (continued)
Hewlett-Packard Co. 65,000 $ 4,842,500
Informix Corp. (a) 23,000 583,625
Intel Corp. 293,800 18,601,213
International Business Machines Corp. 101,000 9,696,000
Microsoft Corp. (a) 128,400 11,604,150
Oracle Systems Corp. (a) 252,650 9,758,606
Pitney Bowes Inc. 114,000 4,374,750
Silicon Graphics, Inc. (a) 49,000 1,953,875
3Com Corp. (a) 30,000 2,010,000
Texas Instruments, Inc. 44,700 5,984,213
Xerox Corp. 43,100 5,053,475
-------------
103,523,232
-------------
Construction (0.9%)
Foster-Wheeler Corp. 85,000 2,996,250
MASCO Corp. 160,000 4,320,000
-------------
7,316,250
-------------
Consumer Products (2.4%)
Lowe's Companies, Inc. 42,000 1,254,750
Procter & Gamble Co. 102,600 7,374,375
VF Corp. 75,500 4,058,125
Warnaco Group, Inc. Class A 300,000 6,000,000
Whirlpool Corp. 18,000 990,000
-------------
19,677,250
-------------
Cosmetics & Toiletries (2.0%)
Avon Products, Inc. 151,700 10,163,900
The Gillette Co. 137,200 6,122,550
-------------
16,286,450
-------------
Diversified (3.3%)
Coltec Industries Inc. (a) 250,000 4,312,500
Corning, Inc. 147,000 4,814,250
General Electric Co. 110,800 6,246,350
Hanson PLC ADR 220,000 3,877,500
Minnesota Mining & Manufacturing Co. 59,800 3,423,550
U.S. Industries, Inc. (a) 11,000 149,875
Whitman Corp. 200,000 3,875,000
-------------
26,699,025
-------------
Drugs & Health Care (8.8%)
Abbott Laboratories 50,300 2,037,150
Amgen, Inc. (a) 61,400 4,938,862
Becton, Dickinson & Co. 49,900 2,906,675
Bristol-Myers Squibb Co. 70,000 4,768,750
Cardinal Health, Inc. 30,000 1,417,500
Ciba-Geigy A G ADR 92,900 3,390,850
16
<PAGE>
Common Stocks (continued) Shares Market Value
- -----------------------------------------------------------------------
Drugs & Health Care (continued)
Columbia/HCA Healthcare Corp. 92,500 $ 4,000,625
Johnson & Johnson 70,900 4,794,613
Medtronic Inc. 93,400 7,203,475
Merck & Co., Inc. 150,000 7,350,000
Oxford Health Plans Inc. (a) 24,000 1,134,000
Pfizer, Inc. 35,800 3,307,025
Quorum Health Group, Inc. (a) 50,000 1,012,500
Scherer R.P. (a) 30,000 1,267,500
Schering Plough Corp. 104,000 4,589,000
SmithKline Beecham PLC ADR 154,300 6,982,075
St. Jude Medical, Inc. 31,200 1,563,900
United Healthcare Corp. 80,000 3,310,000
Warner Lambert Co. 60,000 5,182,500
-----------
71,157,000
-----------
Electrical Utilities (0.5%)
Pinnacle West Capital Corp. 170,000 4,165,000
-----------
Electronics & Electrical Equipment (8.0%)
AMP, Inc. 72,400 3,058,900
Analog Devices Inc. (a) 36,000 1,224,000
Arrow Electronics Inc. (a) 125,000 6,218,750
Atmel Corp. (a) 32,600 1,805,225
Cooper Industries Inc. 115,000 4,542,500
General Instrument Corp. (a) 82,900 3,181,288
General Motors Corp. Class H 83,000 3,278,500
Loral Corp. 67,000 3,467,250
Molex Inc. 31,250 1,140,625
Motorola, Inc. 150,000 10,068,750
Nokia Corp. ADR 154,000 9,182,250
Philips Electronics N.V. 70,000 2,992,500
Raytheon Co. 101,000 7,840,125
Sensormatic Electronics Corp. 60,000 2,130,000
Tyco International Ltd. 30,000 1,620,000
Westinghouse Electric Corp. 182,400 2,667,600
-----------
64,418,263
-----------
Financial Services (3.9%)
Federal Home Loan Mortgage Corp. 128,000 8,800,000
Federal National Mortgage Association 45,000 4,246,875
First USA Inc. 60,000 2,662,500
MBNA Corp. 120,000 4,050,000
Mercury Finance Co. 75,000 1,443,750
Morgan Stanley Group Inc. 70,000 5,670,000
Travelers Inc. 110,000 4,812,500
-----------
31,685,625
-----------
17
<PAGE>
Common Stocks (continued) Shares Market Value
- -----------------------------------------------------------------------
Food & Beverage (2.7%)
Dole Food Inc. 90,000 $ 2,621,250
McDonalds Corp. 78,000 3,051,750
PepsiCo Inc. 102,400 4,672,000
Pioneer Hi-Bred International Inc. 38,000 1,596,000
Safeway Inc. (a) 81,000 3,027,375
Unilever N.V. 50,000 6,506,250
-----------
21,474,625
-----------
Hotels & Leisure (0.9%)
Circus Circus Enterprises, Inc. (a) 104,300 3,676,575
Disney (Walt) Co. 33,400 1,857,875
Hospitality Franchise Systems Inc. 40,000 1,385,000
-----------
6,919,450
-----------
Industrial Equipment (0.8%)
Dover Corp. 91,000 6,620,250
-----------
Insurance (7.8%)
AFLAC Inc. 140,000 6,125,000
American General Corp. 105,000 3,543,750
American International Group, Inc. 56,300 6,418,200
Aon Corporation 111,450 4,151,512
The Chubb Corp. 45,000 3,605,625
Cigna Corp. 31,600 2,452,950
EXEL Limited 125,000 6,500,000
Marsh & McLennan Companies, Inc. 92,000 7,463,500
MBIA Inc. 63,000 4,189,500
MGIC Investment Corp. 84,200 3,946,875
PMI Group 20,000 867,500
Progressive Corp. 140,000 5,372,500
Providian Corp. 104,000 3,770,000
Transamerica Corp. 80,000 4,660,000
-----------
63,066,912
-----------
Metals & Mining (0.6%)
Freeport-McMoRan Copper & Gold Inc. Class A 12,500 257,813
Freeport-McMoRan Inc. 250,000 4,406,250
-----------
4,664,063
-----------
Oil & Gas (8.1%)
Amoco Corp. 58,300 3,884,237
Anadarko Petroleum 31,100 1,341,187
Baker Hughes Inc. 155,000 3,177,500
British Petroleum PLC ADR 22,312 1,910,465
Burlington Resources, Inc. 75,000 2,765,625
Elf Aquitaine Inc. ADR 98,543 3,670,726
Enron Corp. 119,000 4,179,875
Exxon Corp. 100,000 7,062,500
18
<PAGE>
Common Stocks (continued) Shares Market Value
- -----------------------------------------------------------------------
Oil & Gas (continued)
Repsol S.A. ADR 125,000 $ 3,953,125
Royal Dutch Petroleum Co. 113,000 13,771,875
Tenneco Inc. 95,700 4,402,200
Triton Energy Corp. (a) 150,000 6,956,250
Union Texas Petroleum Holdings, Inc. 200,000 4,225,000
USX Marathon Group 204,800 4,044,800
-----------
65,345,365
-----------
Paper (3.1%)
Alco Standard Corporation 25,000 1,996,875
Avery Dennison Corp. 96,000 3,840,000
Champion International Corp. 100,000 5,212,500
International Paper Co. 47,100 4,038,825
James River Corp of VA 115,000 3,176,875
Union Camp Corp. 124,300 7,193,863
-----------
25,458,938
-----------
Photographic Equipment & Supplies (0.9%)
Eastman Kodak Company 90,800 5,504,750
Polaroid Corp. 33,000 1,344,750
-----------
6,849,500
-----------
Pollution Control (0.8%)
Browning-Ferris Industries Inc. 183,300 6,621,713
-----------
Publishing (2.5%)
American Greetings Corp. 236,400 6,944,250
Gannett Co., Inc. 67,300 3,651,025
McGraw Hill, Inc. 33,000 2,503,875
Readers Digest Association Inc. Class A 152,000 6,707,000
-----------
19,806,150
-----------
Railroads (0.6%)
Burlington Northern Inc. 76,500 4,848,188
-----------
Retail Trade (4.3%)
American Stores Co. 100,000 2,812,500
AutoZone Inc. (a) 110,000 2,763,750
Barnes & Noble, Inc. (a) 35,000 1,190,000
Home Depot Inc. 85,700 3,481,563
Kohls Corp. (a) 26,000 1,186,250
May Department Stores Co. 250,000 10,406,250
Office Depot Inc. (a) 145,600 4,095,000
Penney (J.C.) Co., Inc. 100,000 4,800,000
Wal-Mart Stores Inc. 160,000 4,280,000
-----------
35,015,313
-----------
19
<PAGE>
Common Stocks (continued) Shares Market Value
- -----------------------------------------------------------------------
Rubber & Plastics (0.5%)
The Goodyear Tire and Rubber Co. 104,800 $ 4,323,000
-----------
Services (0.7%)
Loewen Group Inc. 65,000 2,315,625
Manpower Inc. 24,000 612,000
Service Corporation International 75,000 2,371,875
-----------
5,299,500
-----------
Telecommunications (4.3%)
Airtouch Communications (a) 104,700 2,983,950
American Telephone & Telegraph 80,000 4,250,000
Andrew Corp. (a) 37,500 2,170,312
Ericsson (L.M.) Telefonaktiebolaget ADR
Class B 463,200 9,264,000
Pacific Telesis Group 195,000 5,216,250
Sprint Corp. 175,000 5,884,375
Tele Communications, Inc. N.E. Class A (a) 128,200 3,004,688
U.S. Robotics Corp. 15,000 1,635,000
-----------
34,408,575
-----------
Transportation (1.2%)
AMR Corp. (a) 30,000 2,238,750
Ryder Systems, Inc. 163,200 3,896,400
Union Pacific Corp. 70,000 3,876,250
-----------
10,011,400
------------
Total Common Stocks (Cost $586,771,570) 780,523,198
------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Short-term Investments (3.5%) Interest Maturity Par Market
Rate Date Value Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper (1.4%)
Associates Corp. of North America 5.90% 07/05/95 $2,000,000 $ 1,998,689
Chevron Oil Finance Co. 5.92 07/03/95 1,000,000 999,671
Cooperative Assoc. of Tractor Dealers 6.02 07/11/95 1,000,000 998,328
Dresdner US Finance 5.98 07/06/95 3,000,000 2,997,508
General Electric Capital Services, Inc. 5.85 07/13/95 2,000,000 1,996,100
Prudential FDG Corp. 5.93 07/11/95 2,500,000 2,495,882
------------
Total Commercial Paper 11,486,178
------------
U.S. Government Security (1.0%)
U.S. Treasury Bill 5.60 07/06/95 8,000,000 7,993,778
------------
Repurchase Agreement (1.1%)
State Street Bank & Trust Co. dated 06/30/95, 5.500%, to be repurchased
at $9,161,197 on 07/03/95, collateralized by $8,750,000 U.S. Treasury Notes at
7.25%, due 05/15/16, with a current market value of $9,340,625 9,157,000
------------
Total Short-term Investments (Cost $28,636,956) 28,636,956
------------
Total Investments (100.1%) (Cost $615,408,526) (b) 809,160,154
------------
Other Assets and Liabilities, Net (-0.1%) (1,019,927)
------------
Net Assets (100.0%) $808,140,227
=============
Net Asset Value Per Share (76,742,380 shares outstanding) $10.53
=============
(a) Non-income producing security.
(b) The cost of investment for Federal income tax purposes is $615,676,984.
Gross unrealized appreciation and
depreciation of investments at
June 30, 1995 is as follows:
Gross unrealized appreciation $196,871,412
Gross unrealized depreciation (3,388,242)
-------------
Net unrealized appreciation $193,483,170
=============
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Statement
of Assets and
Liabilities
June 30, 1995
(Unaudited)
Assets:
Investments at market value (Identified cost--$615,408,526) $809,160,154
Receivable for investments sold 4,898,201
Dividends and interest receivable 1,216,879
Other assets 98,379
-------------
Total assets 815,373,613
-------------
Liabilities:
Payable for investments purchased 6,496,470
Management fees payable 485,309
Administrative fee payable 126,218
Accrued expenses payable 125,389
-------------
Total liabilities 7,233,386
-------------
Net assets $808,140,227
=============
Net assets represented by:
Paid-in capital (unlimited number of shares of beneficial
interest without par value authorized, 76,742,380 shares
outstanding) $572,325,026
Undistributed net investment income 3,816,288
Accumulated net realized gains on investment, less
distributions 38,247,285
Net unrealized appreciation of investments 193,751,628
-------------
Total net assets applicable to outstanding shares of
beneficial interest ($10.53 per share) $808,140,227
=============
See Notes to Financial Statements.
22
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Statement of
Operations
Six Months Ended
June 30, 1995
(Unaudited)
Investment income:
Dividends $ 6,703,351
Interest 1,168,982
------------
Total investment income 7,872,333
Expenses:
Management fees $ 2,799,787
Administrative fees 730,240
Custodian and transfer agent fees 210,309
Proxy and shareholder communication expense 134,832
Printing expense 59,081
Legal and audit fees 34,808
Insurance expense 25,702
Trustees' fees and expense 20,470
Miscellaneous expense 40,816
----------
Total expenses 4,056,045
------------
Net Investment Income 3,816,288
Realized and unrealized gains/(losses) on
investments:
Net realized gains on investment
transactions:
Proceeds from sales 189,424,906
Cost of investments sold 150,878,740
------------
Net realized gains on investment
transactions 38,546,166
Net unrealized appreciation of investments:
Beginning of period 100,823,142
End of period 193,751,628
------------
Change in unrealized appreciation--net 92,928,486
------------
Net increase in net assets resulting from
operations $135,290,940
=============
See Notes to Financial Statements.
23
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Statements
of Changes in
Net Assets
Six Months
Ended
June 30, Year Ended
1995 December 31,
(Unaudited) 1994
Operations:
Net investment income $ 3,816,288 $ 8,235,508
Net realized gains on investment
transactions 38,546,166 39,502,582
Change in unrealized appreciation-net 92,928,486 (55,240,220)
---------- -------------
Net increase (decrease) in net assets
resulting from operations 135,290,940 (7,502,130)
----------- ------------
Distributions declared from:
Net investment income -- (8,235,508)
Net realized gains on investments (3,069,695) (37,685,681)
Paid-in capital (34,534,071) (25,433,673)
---------- ------------
Total distributions (37,603,766) (71,354,862)
---------- ------------
Capital transactions:
Increase in net assets from capital
share transactions -- 64,454,198
---------- ------------
Total increase (decrease) in net assets 97,687,174 (14,402,794)
Net Assets
Beginning of year 710,453,053 724,855,847
----------- -------------
End of Period (including undistributed
net investment income of $3,816,288 at
June 30, 1995) $808,140,227 $710,453,053
============ =============
See Notes to Financial Statements.
24
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Financial
Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
Six Months
Ended
June 30,
1995
(Unaudited) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 9.26 $10.40 $ 10.78 $ 11.20 $ 8.92 $ 9.58
----------- ------ ------ ------ --- -----
Income from Investment Operations:
Net investment income 0.05 0.11 0.12 0.16 0.17 0.18
Net realized and unrealized
gains/(losses) on securities 1.71 (0.20) 0.78(a) 0.54 3.13 0.06
Provision for Federal income tax (0.18)
----------- ------ ------ ------ --- -----
Total from Investment Operations 1.76 (0.09) 0.72 0.70 3.30 0.24
----------- ------ ------ ------ --- -----
Less Distributions:
Dividends from net investment
income (0.12) (0.12) (0.18) (0.15) (0.20)
Distributions from realized
capital gains (0.04) (0.52) (0.58) (0.66) (0.87) (0.47)
Returns of Capital (0.45) (0.36) (0.37) (0.23) (0.23)
----------- ------ ------ ------ --- -----
Total distributions (0.49) (1.00) (1.07) (1.07) (1.02) (0.90)
----------- ------ ------ ------ --- -----
Change due to rights offering (0.05)(b) (0.03)(b) (0.05)(b)
----------- ------ ------ ------ ------ -----
Net asset value at end of period $10.53 $ 9.26 $ 10.40 $ 10.78 $ 11.20 $ 8.92
=========== ====== ====== ====== ====== ======
Per share market value at end of
period $ 10 $8-1/2 $11-1/8 $11-1/8 $10-3/4 $7-3/4
=========== ====== ====== ====== ====== ======
Total Investment Return for Shareholders: (c)
Based on net asset value (d) 19.4%* (0.8%) 8.8% 6.9% 39.3% 4.2%
Based on market price (e) 23.6%* (14.9%) 12.7% 14.9% 53.9% 5.1%
Ratios and Supplemental Data
Net assets at end of period
(millions) $ 808 $ 710 $ 725 $ 665 $ 601 $ 479
Ratio of expenses to average net
assets 1.08%** 1.07% 1.08% 1.08% 1.16% 1.23%
Ratio of net investment income to
average net assets 1.01%** 1.16% 1.08% 1.44% 1.66% 1.98%
Portfolio turnover rate 23%* 44% 72% 57% 72% 68%
</TABLE>
*On a non-annualized basis
**On an annualized basis
(a) Before provision for Federal income tax.
(b) Effect of ALL-STAR's rights offering for shares at a price below net
asset value.
(c) Calculated assuming all distributions reinvested and all rights
exercised.
(d) Return calculated by valuing at net asset value per share.
(e) Return calculated by valuing at market price per share.
See Notes to Financial Statements.
25
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Notes to
Financial
Statements
Note 1. Organization and Accounting Policies
Liberty ALL-STAR Equity Fund ("ALL-STAR"), organized as a Massachusetts
business trust on August 20, 1986, is a closed-end, diversified management
investment company. ALL-STAR is managed by Liberty Asset Management Company
(the "Manager"), an indirect wholly-owned subsidiary of Liberty Mutual
Insurance Company.
The following is a summary of significant accounting policies followed by
ALL-STAR in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
Valuation of Investments--Portfolio securities listed on an exchange and
over-the-counter securities quoted on the NASDAQ system are valued on the
basis of the last sale on the date as of which the valuation is made, or,
lacking any sales, at the current bid prices. Over-the-counter securities not
quoted on the NASDAQ system are valued on the basis of the mean between the
current bid and asked prices on that date. Securities for which reliable
quotations are not readily available are valued at fair value, as determined
in good faith and pursuant to procedures established by the Trustees.
Short-term instruments maturing in more than 60 days for which market
quotations are readily available are valued at current market value.
Short-term instruments with remaining maturities of 60 days or less are
valued at amortized cost, unless the Board of Trustees determines that this
does not represent fair value.
Provision for Federal Income Tax--ALL-STAR qualifies as a "regulated
investment company." As a result, a Federal income tax provision is not
required for amounts distributed to shareholders.
Other--Security transactions are accounted for on the trade date. Interest
income and expenses are recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date.
Note 2. Management and Administrative Fees
Under ALL-STAR's management and portfolio management agreements, ALL-STAR
pays the Manager a management fee for its investment management services at
an annual rate of 0.80% of ALL-STAR's average weekly net asset value. The
Manager pays each Portfolio Manager a portfolio management fee at an annual
rate of 0.40% of the average weekly net asset value of the portion of the
investment portfolio managed by it. ALL-STAR also pays the Manager a fee for
administrative services at an annual rate of 0.20% of ALL- STAR's average
weekly net asset value. The annual fund management and administrative fees
are reduced to 0.72% and 0.18%, respectively, on average weekly net assets in
excess of $400,000,000 and the aggregate annual fees payable by the Manager
to the Portfolio Managers are reduced to 0.36% of ALL-STAR's average weekly
net assets in excess of $400,000,000.
Under the terms of a settlement of litigation initiated in 1988, the Manager
will, until July 1997 or ALL-STAR's conversion to an open-end fund, whichever
occurs first, make monthly rebates of a portion of its fee for investment
management services ranging from 3.875% of such fee if the Fund's net assets
are more than $550 million to zero if such assets are under $300 million.
During the period ended June 30, 1995, $109,314 in rebates has been offset
against management fees of the Fund.
Note 3. Capital Transactions
In a rights offering commencing August 8, 1994, shareholders exercised rights
to purchase 4,704,931 shares at $9.14 per share for proceeds, net of
expenses, of $42,793,069. In addition, during the year ended December 31,
1994, distributions in the amount of $26,072,896 were paid in newly issued
shares valued at market value or net asset value, but not less than 95% of
market value, resulting in the issuance of 2,365,415 shares. In a rights
offering commencing September 16, 1993, shareholders exercised rights to
purchase 4,227,570 shares at $10.41 per share for proceeds, net of expenses,
of $43,759,004. In addition, during the year ended December 31, 1993,
distributions in the amount of $40,734,925 were paid in newly issued shares
valued at net asset value, but not less than 95% of market value, resulting
in the issuance of 3,814,605 shares.
Note 4. Securities Transactions
Realized gains and losses are recorded on the identified cost basis for both
financial reporting and Federal income tax purposes. The cost of investments
purchased and the proceeds from investments sold excluding short-term
maturities for the period ended June 30, 1995
26
<PAGE>
LIBERTY ALL STAR EQUITY FUND
Notes to
Financial
Statements
(continued)
were $150,878,740 and $189,419,315, respectively.
Note 5. Distributions to Shareholders
ALL-STAR currently has a policy of paying distributions on its common shares
totalling approximately 10% of its net asset value per year, payable in four
quarterly distributions of 2.5% of ALL-STAR's net asset value at the close of
the New York Stock Exchange on the Friday prior to each quarterly declaration
date. Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
Federal income tax regulations, which may differ from generally accepted
accounting principles.
[boxed text]
1995 Annual Meeting of Shareholders
Liberty ALL-STAR Equity Fund's 1995 Annual Meeting of Shareholders was held
on April 27, 1995. At the Meeting, Mr. Robert J. Birnbaum was elected as
Trustee of the class whose term expires with the 1997 annual meeting and Mr.
Richard W. Lowry was elected as a Trustee of the class whose term expires
with the 1998 annual meeting. Messrs. James E. Grinnell and Richard I.
Roberts continue in office as Trustees.
In addition, shareholders approved ALL-STAR's new Portfolio Management
Agreements with Columbus Circle Investors and Provident Investment Counsel,
Inc. entered into following the acquisitions of their predecessor firms on
November 16, 1994 and February 15, 1995, respectively, and ratified the Board
of Trustees' selection of KPMG Peat Marwick LLP as ALL-STAR's independent
auditors for the year ending December 31, 1995.
The number of votes cast for, against or withheld and the number of
abstentions on each matter were as follows:
1. Election of Trustees
Robert J. Birnbaum For: 70,418,094
Withheld Authority: 1,134,490
Richard W. Lowry For: 70,488,930
Withheld Authority: 1,063,654
2. Approval of new Portfolio Management Agreement with successor to Columbus
Circle Investors
For: 69,246,961
Against: 714,972
Abstain: 1,590,649
3. Approval of new Portfolio Management Agreement with successor to Provident
Investment Counsel, Inc.
For: 69,184,148
Against: 751,491
Abstain: 1,616,945
4. Ratification of selection of KPMG Peat Marwick LLP as independent auditors
for 1995
For: 70,249,103
Against: 415,203
Abstain: 888,277
[end boxed text]
