- -----------------------------
LIBERTY ALL * STAR EQUITY FUND
New York Stock Exchange Trading Symbol: USA
Fund Manager
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lib.com/LAMCO/lamco.html
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110
Custodian
Boston Safe Deposit & Trust Company
One Cabot Road
Medford, Massachusetts 02155
Investor Assistance,
Transfer and Dividend
Disbursing Agent and Registrar
State Street Bank and Trust Company
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
Legal Counsel
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
Trustees
Robert J. Birnbaum*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
Officers
Harold W. Cogger, Chairman of the Board of Trustees
Richard R. Christensen, President & Chief Executive Officer
William R. Parmentier, Jr., Vice President & Chief Investment Officer
Peter L. Lydecker, Treasurer and Controller
John L. Davenport, Secretary
*Member of the audit committee.
- ----------------------------------------------------------------------
[Liberty Logo]
Printed with Soybean Inks
[Recycle Logo] Printed on Recycled Paper D/69m/5-96
LIBERTY
ALL*STAR
EQUITY FUND
- ---------------------------------
1st
Quarter Report
1996
<PAGE>
- -----------------------------------------------------------------------------
Liberty ALL * STAR Equity Fund
- --------------------------
First Quarter Report
Chairman's Letter
To Our Fellow Shareholders: April 1996
The net asset value (NAV) of a common share of the Fund rose from $11.03 on
December 31, 1995 to $11.42 on March 31, 1996, after deducting the cash
distribution of 29 cents paid to shareholders during the quarter. The market
price of a share of the Fund traded in a range from $10.50 to $11.50 before
closing the quarter at $11.375. The ending price represented a discount to
NAV of 0.4 percent compared with a discount to NAV of 1.4 percent on December
31, 1995. Key investment results and comparisons are noted in the box.
Fund Performance for the first quarter and latest 12 months ended
March 31, 1996. Figures shown for the Fund and the Lipper Growth &
Income Mutual Fund Average are total returns, which include income,
less fees and other operating expenses. Figures shown for the
unmanaged S&P 500 and Dow Jones indices are total returns including
income.
First Latest
Quarter 12 Months
---------- ------------
Liberty ALL-STAR Equity Fund:
Shares Valued at Net Asset
Value 6.2% 28.5%
Shares Valued at Market Price
Reinvested 7.3% 30.7%
Lipper Growth & Income Mutual
Fund Average 5.7% 27.9%
S&P 500 Stock Index 5.4% 32.0%
Dow Jones Industrial Average 9.8% 37.5%
Fund's Closing Price Range $11.375 to $11.375 to
10.625 9.375
Fund's (Discount)/Premium Range -6.4% to -10.3% to
1.2% 1.2%
The stock market continued its advance for the fifth quarter in a row. As the
box at the left shows, ALL-STAR was up 6.2 percent, which compares favorably
with 5.7 percent for the Lipper Growth & Income Mutual Fund Average
(ALL-STAR's primary benchmark comparison) and 5.4 percent for the S&P 500
Index.
In the first quarter, economically sensitive cyclical stocks performed well.
Investors' perceptions of the economy appeared to have shifted from a fear of
recession to an expectation of moderate growth. As a result, the value style
of investment management outperformed the growth style across the
capitalization spectrum. ALL-STAR, with its multi-management and multi-style
approach, performed well during the quarter.
At the Annual Shareholders Meeting in April, Richard I. Roberts retired as
Chairman and I succeeded him in that capacity. As the Founder of ALL-STAR in
1986, Dick was critical to its success during its first decade. We thank him
and wish him well in his retirement.
Sincerely,
[/s/ Harold W. Cogger]
Harold W. Cogger
Chairman of the Board of Trustees
Liberty ALL-STAR Equity Fund
1
<PAGE>
- -----------------------------------------------------------------------------
Liberty ALL * STAR Equity Fund
- --------------------
First Quarter Report
President's Letter
To Our Fellow Shareholders: April 1996
As discussed in the Chairman's letter, the stock market's advance continued
unabated during the first quarter. However, the quarter was marked by
significant rotation among the various economic sectors of the market as
investors sought companies that would perform well in a moderate growth
environment. In contrast to the generally strong market, utilities suffered a
loss for the quarter in the aftermath of both a bitter winter across the U.S.
and the February passage of the Telecommunications Bill.
Despite a rising interest rate environment, finance issues posted an
impressive gain for the quarter, paced by the brokerage firms that benefited
from extensive initial public offerings and merger advisory fees and banks
that benefited from consolidation. Previously sluggish industries like
chemicals, air transportation and consumer durables performed strongly. The
retail sector also bounced back as investors looked for undervalued and
neglected areas of the market. Conversely, the technology sector experienced
a sharp correction in January followed by a modest rally toward the end of
the quarter.
For the first quarter, the value style of investment management outperformed
the growth style. Value managers typically concentrate their portfolios in
the industrial and cyclical areas of the market and as a result were well
positioned for the rotation referred to above. Palley-Needelman, a value
manager in the Fund, is the subject of the manager interview beginning on
page 7. Roger Palley discusses Palley-Needelman's investment philosophy and
decision making process. He also offers his outlook for the remainder of
1996.
Liberty Asset Management Company's blending of different managers and styles
is the cornerstone of our investment management process and is key to
achieving ALL-STAR's dual objectives of above average returns with lower than
average volatility compared to other growth and income funds.
Monthly portfolio and other information is now available to shareholders via
the Internet. LAMCO's Internet address can be found on the back cover of this
report.
Sincerely,
[/s/ Richard R. Christensen]
Richard R. Christensen
President and Chief Executive Officer
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, as a
whole, while the final column shows portfolio characteristics for the entire
S&P 500 Stock Index.
The Investment Styles practiced by ALL-STAR's five Portfolio Managers are:
Palley-Needelman Asset Management, Inc.
Companies with attractive valuations, sound fundamentals and good prospects.
Cooke & Bieler, Inc.
Companies with sound fundamentals: seasoned, well-managed and financially
strong.
Oppenheimer Capital
Contrarian holdings being overlooked and undervalued by investors.
Columbus Circle Investors
Companies whose growing earnings are not fully reflected in their share
prices.
Provident Investment Counsel, Inc.
Companies with fast growing earnings and bright prospects.
Portfolio Characteristics
as of
March 31, 1996
<TABLE>
<CAPTION>
Investment Style Spectrum
Value Growth
Palley- Cooke &
Needelman Bieler Oppenheimer
<S> <C> <C> <C> <C> <C>
------ ----- ----------
- -------------------------------------------------------------------------------------------------
Portfolio 1. Number of Holdings 35 34 28
2. Percent in Top Ten 35% 43% 48%
- -------------------------------------------------------------------------------------------------
Size and Debt 3. Average Sales or Revenues $15.4 $12.7 $12.9
(billions)
4. Average Debt/Capital Ratio 35% 22% 43%
- -------------------------------------------------------------------------------------------------
Profitability 5. Average Return on Total Capital 10% 20% 14%
6. Average Return on Equity 16% 24% 23%
- -------------------------------------------------------------------------------------------------
Growth 7. Average Five-Year Sales 4% 7% 12%
Per Share Growth
8. Average Five-Year Earnings 24% 14% 27%
- -------------------------------------------------------------------------------------------------
Per Share Growth
Yield 9. Dividend Yield 2.6% 2.5% 1.6%
10. Average Five-Year 49% 48% 31%
- -------------------------------------------------------------------------------------------------
Dividend Payout Ratio
Valuation 11. Average Price/Earnings Ratio 17.5x 17.1x 15.4x
12. Average Price/Book Value Ratio 2.7x 3.0x 2.9x
=============================================================== ====== ===== ==========
</TABLE>
<TABLE>
<CAPTION>
S&P
Columbus Total 500
Circle Provident ALL-STAR Index
--------- ----------- ----- -------
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio 48 49 165 500
35% 39% 15% 18%
- ------------------------------------------------------------------
Size and Debt $13.8 $6.4 $12.3 $23.1
25% 27% 31% 34%
- ------------------------------------------------------------------
Profitability 14% 17% 15% 14%
18% 23% 21% 21%
- ------------------------------------------------------------------
Growth 17% 21% 12% 9%
26% 25% 23% 22%
- ------------------------------------------------------------------
Yield 0.9% 0.6% 1.7% 2.3%
21% 16% 33% 45%
- ------------------------------------------------------------------
Valuation 28.5x 29.3x 19.8x 18.2x
3.7x 6.3x 3.3x 3.2x
================== ======= ========= ==== =====
</TABLE>
3
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
- ---------------------------------------------------------------
Major Stock Changes in the
First Quarter 1996
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
first quarter of 1996.
<TABLE>
<CAPTION>
Shares
---------------------------------
Held
Security Name Additions Reductions 3/31/96
- -------------------------- -------- --------- --------
<S> <C> <C> <C>
Adaptec, Inc. 53,900 53,900
Allstate Corp. 73,500 73,500
Cardinal Health, Inc. 50,900 80,900
Cooper Industries, Inc. 84,000 84,000
Fleet Financial Group,
Inc. 105,200 146,700
Hanson PLC ADR 300,000 300,000
Kimberly-Clark Corp. 55,900 173,556
Parker-Hannifin Corp. 90,000 142,500
American Express Co. (85,000) 0
Applied Materials, Inc. (129,800) 0
Bank of New York, Inc. (80,000) 57,100
The Chubb Corp. (30,000) 0
Freeport-McMoRan, Inc. (83,333) 0
The Goodyear Tire and
Rubber Co. (114,800) 0
Hewlett-Packard Co. (41,400) 64,000
Intel Corp. (120,000) 75,000
Loral Corp. (134,000) 0
LSI Logic Corp. (92,200) 0
Medtronic, Inc. (80,700) 88,000
Merck & Co., Inc. (58,700) 157,500
Monsanto Co. (35,200) 86,000
SmithKline Beecham PLC ADR (65,000) 0
VF Corp. (85,500) 0
</TABLE>
- ---------------------------------------------------------------
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 Purchase Plan, whereby distributions are automatically
invested in additional shares of ALL-STAR. In addition, three rights
offerings have allowed investors to acquire additional shares at a discount
from the market price. 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 table on the facing page shows, an original share, including the
rights offering and dividend reinvestment shares, has grown to a net asset
value of $38.26 (3.350 shares times the current $11.42 net asset value per
share) and a market price value of $38.11 (3.350 shares times the current
$11.375 market price per share). Excluding the rights offering shares, an
original share has grown to 2.715 shares. Thus, the original share has grown
to a net asset value of $31.01 (2.715 shares times the current $11.42 net
asset value per share) and a market price value of $30.88 (2.715 shares times
the current $11.375 market price per share).
1996 Annual Meeting
At ALL-STAR's 1996 Annual Meeting held on April 17, shareholders reelected
James E. Grinnell and elected Harold W. Cogger as Trustees, and ratified the
selection of KPMG Peat Marwick LLP as the Fund's Independent Auditors for the
current year.
4
<PAGE>
Shareholders'
Investment Growth
A report on per-share values,
distributions and reinvestment
since ALL-STAR's inception
[Begin Mountain Chart]
<TABLE>
<CAPTION>
Shares
Owned Shares Shares
at Per Purchased Acquired Shares
Beginning Share Through Through Owned
of Distri- Reinvestment Rights at End
Year Period butions Program Offering of Period
------------ ------- ------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140
------------ ----- ---- -------- ----- -------
1988 1.140 $0.64 .107 -- 1.247
------------ ----- ---- -------- ----- -------
1989 1.247 $0.95 .156 -- 1.403
------------ ----- ---- -------- ----- -------
1990 1.403 $0.90 .168 -- 1.571
------------ ----- ---- -------- ----- -------
1991 1.571 $1.02 .171 -- 1.742
------------ ----- ---- -------- ----- -------
1992 1.742 $1.07 .199 0.179(2) 2.120
------------ ----- ---- -------- ----- -------
1993 2.120 $1.25(5) .266 0.138(3) 2.524
------------ ----- ---- -------- ----- -------
1994 2.524 $1.00 .277 .0155(4) 2.956
------------ ----- ---- -------- ----- -------
1995 2.956 $1.04 .311 -- 3.267
------------ ----- ---- -------- ----- -------
1996
1st Quarter 3.267 $0.29 .083 -- 3.350
------------ ----- ---- -------- ----- -------
</TABLE>
<TABLE>
<CAPTION>
NAV(1) Price
Per Total Per
Share NAV Share Total
at End of at End Price of
of Shares of Shares
Year Period Owned Period Owned
- ------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
1987 $ 7.90 $ 9.01 6 $ 6.84
- ------------ ----- ----- ----- ------
1988 $ 8.29 $10.34 7-1/4 $ 9.04
- ------------ ----- ----- ----- ------
1989 $ 9.58 $13.44 8-1/4 $11.57
- ------------ ----- ----- ----- ------
1990 $ 8.92 $14.01 7-3/4 $12.18
- ------------ ----- ----- ----- ------
1991 $11.20 $19.51 10-3/4 $18.73
- ------------ ----- ----- ----- ------
1992 $10.78 $22.85 11-1/8 $23.59
- ------------ ----- ----- ----- ------
1993 $10.40 $26.25 11-1/8 $28.08
- ------------ ----- ----- ----- ------
1994 $ 9.26 $27.37 8-1/2 $25.13
- ------------ ----- ----- ----- ------
1995 $11.03 $36.04 10-7/8 $35.53
- ------------ ----- ----- ----- ------
1996
1st Quarter $11.42 $38.26 11-3/8 $38.11
- ------------ ----- ----- ----- ------
</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.
[End Mountain Chart]
5
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Top 50
Holdings
As of
March 31, 1996
<TABLE>
<CAPTION>
Rank
as of Value Percent of
Rank 12/31/95 Security Name ($000) Net Assets
- ----- ------- ------------------------------------------ ----- -----------
<S> <C> <C> <C> <C>
1 4 Microsoft Corp. 15,747 1.7%
2 1 Monsanto Co. 13,201 1.5
3 3 Royal Dutch Petroleum Co. ADR 13,150 1.5
4 7 Avon Products, Inc. 13,008 1.4
5 13 Kimberly-Clark Corp. 12,930 1.4
6 6 Raytheon Co. 12,608 1.4
7 10 May Department Stores Co. 12,545 1.4
8 11 Federal Home Loan Mortgage Corp. 11,935 1.3
9 5 First Data Corp. 11,768 1.3
10 12 Telefonakteibolaget LM Ericsson,
Class B, ADR 11,030 1.2
11 15 Computer Associates International, Inc. 10,998 1.2
12 9 McDonnell Douglas Corp. 10,995 1.2
13 18 Citicorp 10,400 1.2
14 16 Cisco Systems, Inc. 10,017 1.1
15 2 Merck & Co., Inc. 9,804 1.1
16 19 American Greetings Corp. 9,752 1.1
17 21 Oracle Systems Corp. 9,517 1.1
18 26 Boeing Co. 8,870 1.0
19 23 Pitney Bowes, Inc. 8,820 1.0
20 27 EXEL Limited 8,625 1.0
21 22 American International Group, Inc. 8,590 1.0
22 20 Triton Energy Corp. 8,363 0.9
23 25 Exxon Corp. 8,163 0.9
24 30 United Healthcare Corp. 8,149 0.9
25 24 Amgen, Inc. 7,952 0.9
26 28 Marsh & McLennan Companies, Inc. 7,802 0.9
27 29 General Electric Co. 7,788 0.9
28 59 International Business Machines Corp. 7,779 0.9
29 36 Schering-Plough Corp. 7,266 0.8
30 34 Travelers Group, Inc. 7,260 0.8
31 40 State Street Boston Corp. 7,250 0.8
32 92 American Stores Co. 7,055 0.8
33 37 Dover Corp. 7,046 0.8
34 41 AFLAC, Inc. 7,031 0.8
35 45 Federal National Mortgage Association 7,013 0.8
36 47 Repsol SA ADR 6,903 0.8
37 33 Sprint Corp. 6,840 0.8
38 44 Sherwin-Williams Co. 6,834 0.8
39 32 Unilever NV ADR 6,788 0.8
40 114 U.S. Robotics Corp. 6,747 0.7
41 43 Pfizer, Inc. 6,700 0.7
42 48 Genuine Parts Co. 6,615 0.7
43 46 Eastman Kodak Co. 6,546 0.7
44 31 Readers Digest Association, Inc. Class A 6,521 0.7
45 35 Union Pacific Corp. 6,471 0.7
46 57 Union Camp Corp. 6,431 0.7
47 53 Corning, Inc. 6,370 0.7
48 51 Transamerica Corp. 6,364 0.7
49 60 Arrow Electronics, Inc. 6,345 0.7
50 95 Providian Corp. 6,248 0.7
</TABLE>
6
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
[Picture of Roger B. Palley]
Roger B. Palley
Palley-Needelman Asset Management, Inc.
Manager Interview
- -----------------
Superior Returns, Below-Market Risk and a Catalyst = Value Investing at
Palley-Needelman
Palley-Needelman Asset Management, Inc. is one of ALL-STAR's five portfolio
management companies. 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. Recently, we had the
opportunity to talk with Roger B. Palley, President of the firm.
The views expressed in this interview represent the manager's views at the
time of the discussion and are subject to change.
LAMCO: Since it has been more than two years since we interviewed you for a
quarterly report, please review Palley-Needelman's investment philosophy and
style.
Palley: "Investment philosophy and style." Webster's dictionary defines
philosophy as a basic theory about a particular subject. Our "theory"
encompasses a "value" style of investing that has provided clients with
superior returns combined with below-market risk. As "value" managers, we own
stocks with lower-than-market price/earnings ratios and price-to-book ratios.
Other attributes include strong balance sheets, significant free cash flow
and a steady record of dividend payments. We prefer larger capitalization
companies that trade in volume on a daily basis so that there are no
liquidity problems in acquiring or disposing of a particular stock. High
quality is also an important aspect of our style. Stocks rated A- or better
by Standard & Poor's represent about 60 percent of our holdings, compared to
only 35 percent for the Russell 1000 Value Index.
Our search for value goes beyond identifying companies that are
statistically cheap. We must also be able to isolate specific characteristics
that will lead to added shareholder value. We call these "catalysts," and
they include such things as a positive management change, a restructuring
that may unlock hidden value or the prospect of a corporate event, such as a
spinoff or merger, that can add to shareholder wealth. If a catalyst is not
fulfilled in a reasonable period of time, then we sell that issue and move on
to something else with more potential. Another aspect of our style is broad
diversification. We spread the portfolio across about 10 economic sectors and
20 different industries. This avoids a common "value trap," which is finding
too many great bargains in one industry until it represents a large segment
of the portfolio and adds significantly to risk.
Continued on page 8
...............................................................................
"Our search for value goes beyond identifying companies that are
statistically cheap. We must also be able to isolate specific characteristics
that will lead to added shareholder value. We call these 'catalysts' . . . "
--Roger Palley
...............................................................................
7
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Continued from page 7
We also own stocks of foreign-based companies in the form of American
Depository Receipts (ADRs). Since the U.S. now represents only about 25
percent of all publicly traded stocks in the world, we would be ignoring 75
percent of the investment opportunities if we did not look globally. ADRs
currently represent about 13 percent of our portfolio and we have a
self-imposed discipline that they not exceed 20 percent.
LAMCO: Please discuss the first quarter in relation to your investment style.
Palley: The first quarter saw a shift from consumer staple issues to
industrial and cyclical stocks as investors perceived a stronger economy. Two
of the best performing groups were basic materials and consumer cyclicals,
where we were overweighted, as would be expected with our style. We also had
very good individual stock performance within these groups. Monsanto, for
example, a diversified chemical company, was up more than 15 percent for the
quarter. It reached our target and was sold. Our retail stocks also did very
well, with May Company and Dayton Hudson gaining 16 percent and 14 percent,
respectively.
The weakest sectors were public utilities and technology, and we have
minimal exposure to both. The accelerating shakeout in technology stocks left
semiconductors among the worst performing industry groups for the second
straight quarter. Our conservative, large-cap style kept us out of these
stocks. Our primary technology holding, IBM, was up 23 percent for the
quarter, which reaffirmed the benefit of our conservative approach.
As previously mentioned, our style includes ownership of foreign stocks,
and one of our best performers for the quarter was Ciba-Geigy, gaining 41
percent. Ciba, the second largest pharmaceutical company in Switzerland,
announced it is merging with Sandoz, creating one of the largest diversified
drug companies in the world.
LAMCO: Please discuss two or three recent acquisitions for your portfolio and
the reasons you bought them. Also, highlight two stocks that have been in the
portfolio for a long period and the reasons for maintaining the positions.
Palley: We added two new issues to the portfolio in the first quarter--Hanson
PLC and Crown Cork & Seal. Hanson is a U.K. and U.S. based conglomerate made
up of a diverse group of businesses. On January 30, 1996, Hanson announced
that it will split into four separate companies. We believe the separate
businesses are worth more than is currently being reflected in the price of
the stock, and we agree with management's rationale that the individual
companies will have better growth opportunities and will be operated more
efficiently. There will be value added from smaller companies where each
management has more flexibility along with monetary incentives unique to
their own unit rather than to Hanson as a whole. There is an ongoing shift
from income-oriented shareholders to investors with capital appreciation
goals, putting some selling pressure on the stock and helping to create a
buying opportunity. The current price/earnings ratio is 10.5 times estimated
earnings for the year ending September 1996. We have a target price about 20
percent higher than the current price.
Crown Cork & Seal is a worldwide packaging company that has recently made a
large acquisition in Europe. The purchase of Carnaud will double sales and
create significant opportunities for cost savings, coming from a reduction of
selling, general and administrative expense and more efficient raw material
purchasing systems. Product lines will be expanded and different markets will
be addressed. This is the second major purchase after the successful melding
of Continental Can in 1989. After this purchase earnings grew from $1.19 to
$2.29 between 1989 and 1994.
The "new" combined entities will be very strong in the food and beverage
packaging market, while specialty pack
8
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
aging and fast growing plastic packaging will round out the broad product
line. We see strong earnings growth over the next two years along with nearly
$3.00 per share in free cash flow. The price/earnings ratio on forward
earnings for 1996 and 1997 is 20 times and 14 times, respectively, with a
current yield of two percent. Also, the customer base is quite stable in
relation to their business, and cyclical forces should not be a concern.
IBM was first purchased in February of 1994 at $52.00 per share, with
additional purchases on several occasions. Our original thesis is still
intact and, in fact, has improved. To put this to rest once and for all, the
personal computer business for IBM was never a swing factor in our analysis.
More important to us is the success IBM is having in larger, computer related
software/services and systems business. The strategy for using the huge cash
flow generated by IBM for acquisitions has been moving forward. These
additions will bring some new areas for opportunities in the internet world
and service related operations.
...............................................................................
"We sell stocks that reach our price objective on the upside when relative
price/earnings multiples exceed historical norms. In other words, we take our
profit and move on . . . "
--Roger Palley
...............................................................................
The stock is currently trading at approximately 10 times 1996 earnings, and
based on 1997 earnings potential, the price/earnings ratio is less than 9.
This seems inexpensive for a company of IBM's growing successes. The company
is also generating free cash flow of $7 to $8 billion per year, which gives
them more flexibility to raise the dividend, purchase their stock and fund
more niche acquisitions.
Ciba-Geigy was purchased in January of 1995 at $31 per share and is
currently trading at $62. Ciba is a leading pharmaceutical, chemical and
agrochemical producer. It was founded in Switzerland in 1890 and, with total
sales of more than $15 billion, is one of the largest diversified
pharmaceutical companies in the world. Catalysts include an aggressive
restructuring program that should continue to emphasize cost reductions and
productivity gains. We have gained confidence in management, as it has taken
steps to maintain profitability during difficult times and has moved
aggressively to revitalize the pharmaceutical business through key
acquisitions. Last year's purchase of a 49.9 percent interest in Chiron
brings a strong drug portfolio and new DNA technology to the company.
Chiron's projected five-year growth rate of 25 percent should boost Ciba's
earnings.
Ciba's balance sheet is sound, even by Swiss standards. Long-term debt is
only seven percent of total capital and annual free cash flow equals about
four percent of capitalization. In February of this year, the company
announced that it is merging with Sandoz, which is the largest pharmaceutical
company in Switzerland. This will create a worldwide drug powerhouse, thus
resulting in both cost-saving and revenue synergies that will add to earnings
growth.
LAMCO: Please discuss your sell discipline with some specific examples.
Palley: Our sell discipline incorporates various fundamental and technical
inputs. We sell stocks that reach our price objective on the upside when
relative price/earnings multiples exceed historical norms. In other words, we
take our profit and move on to another issue that has more appreciation
potential. This is the easy part of a sell discipline.
Continued on page 10
9
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Continued from page 9
More difficult is when stocks decline and we must decide to buy, sell or
hold. When a stock declines 15 percent from its most recent high on an
absolute basis, or relative to the market (S&P 500) or its industry, the
stock is automatically reviewed. At this time, the investment committee will
look at price movements and the outlook for the company, especially compared
to the original factors that went into buying the stock. If the fundamentals
have turned negative, we will dispose of the issue and limit any more price
erosion. Some of the dynamics we look at very carefully include fundamental
erosion, political or currency risk, and loss of management credibility.
Turning to some specific examples, we bought Philips Electronics at a time
when new management had begun improving the company's profitability, and the
economy in Europe was gaining momentum. After a quick runup, the stock began
to fade. Its important entertainment subsidiary, Polygram, lost earnings
momentum, while its consumer electronics business suffered from an unexpected
slowdown in Europe. Management's ability to control events came into
question, which lowered our confidence. Future earnings growth also became
more dependent upon its semiconductor business, which we felt increased the
riskiness of the investment. Increased risk and loss of confidence in
management led to our decision to sell.
We purchased Monsanto in the fall of 1994. The company had new, aggressive
management, yet was still perceived as a sleepy organization with some
attractive assets but moderate growth prospects. The stock was selling at
about 12 times earnings, which was a significant discount to the market.
After moving up substantially, it reached our target and was sold. At the
time of our sale, the market's perception of Monsanto had changed radically.
Management is now considered superior, growth prospects for its agriculture
business are well above average and its price-earnings ratio has moved up. It
no longer fit our "value" profile.
LAMCO: Please discuss your outlook for 1996. What factors will drive the
market?
Palley: The stock market has been strong for five straight quarters,
beginning on January 1, 1995 and taking the S&P 500 up 45 percent. We think
it's prudent to expect some cooling of this strength for the balance of 1996.
While we are not expecting a long-term bear market, a correction could occur
to consolidate the sharp run-up. We would consider a 10 percent correction as
a buying opportunity, since it would likely build a base for further gains
over the longer term. We look for a total return for 1996 in the 10 to 15
percent range, which is more in line with the historical norm.
The factors that should drive the market in 1996 include: the direction of
interest rates, corporate earnings growth, the valuation level of the market
and supply-demand characteristics. In our opinion, none of these appear to
pose a serious threat over the balance of 1996. While interest rates have
spiked up recently, modest inflation and economic growth point to a
relatively
...............................................................................
"We would consider a 10 percent correction as a buying opportunity, since it
would likely build a base for further gains over the longer term."
--Roger Palley
...............................................................................
10
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
stable environment this year. Corporate earnings are clearly decelerating
from last year's torrid pace of close to 25 percent growth, but should still
gain 5 percent to 10 percent this year. The valuation backdrop for the market
points to some overvaluation but this could last for an extended period.
Finally, there seems to be a ready supply of cash coming into the market.
Stock mutual funds were deluged with $28.9 billion in new money in
January--more than any previous month in history, with similar inflows in
February and March. This trend should continue as baby boomers save more
toward retirement, and as foreign money begins to flow back into the U.S.
market. There is also strong demand for stocks coming from corporations. This
is occurring due to record merger and acquisitions activity, and a high level
of corporate stock buy-back programs. [STAR]
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 have been rewarded as a result of the consistent
reinvestment of distributions. Each share of ALL-STAR owned by shareholders
who have participated in the Dividend Reinvestment Program since the Fund
began operations in 1986 would have grown to 2.715 shares as of March 31,
1996. These shares have a total net asset value of $31.01. 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 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern time.
11
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
<TABLE>
<CAPTION>
Schedule of Investments as of March 31, 1996
(Unaudited)
<S> <C> <C>
Common Stocks (96.7%) Shares Market Value
Aerospace (2.2%)
Boeing Co. 102,400 $ 8,870,400
McDonnell Douglas Corp. 120,000 10,995,000
-------------
19,865,400
-------------
Auto Parts (1.2%)
Eaton Corp. 64,000 3,856,000
Genuine Parts Co. 147,000 6,615,000
-------------
10,471,000
-------------
Banks (4.3%)
Bank of New York Co., Inc. 57,100 2,940,650
Chemical Banking Corp. 59,800 4,215,900
Citicorp 130,000 10,400,000
Corestates Financial Corp. 130,000 5,508,750
Fleet Financial Group, Inc. 146,700 5,941,350
State Street Boston Corp. 145,000 7,250,000
Wachovia Corp. 70,000 3,132,500
-------------
39,389,150
-------------
Broadcasting & Cable (1.4%)
British Sky Broadcasting Group ADR 80,000 3,210,000
Cabletron Systems, Inc. (a) 40,000 2,650,000
Tele-Communications Liberty Media,
Inc., Class A (a) 75,350 1,987,356
Viacom, Inc., Class B (a) 103,000 4,338,875
-------------
12,186,231
-------------
Business Services (1.7%)
Dun & Bradstreet Corp. 51,000 3,091,875
First Data Corp. 166,927 11,768,354
-------------
14,860,229
-------------
Chemicals (2.6%)
The Lubrizol Corp. 123,000 3,628,500
Monsanto Co. 86,000 13,201,000
Sherwin-Williams Co. 154,000 6,833,750
-------------
23,663,250
-------------
Computer & Business Equipment (10.8%)
Automatic Data Processing, Inc. 100,000 3,937,500
Ceridian Corp. (a) 40,000 1,720,000
Cisco Systems, Inc. (a) 216,000 10,017,000
Computer Associates International,
Inc. 153,550 10,998,019
Computer Sciences Corp. (a) 40,000 2,815,000
General Motors Corp., Class E 62,700 3,573,900
Hewlett-Packard Co. 64,000 6,016,000
Informix Corp. (a) 157,100 4,143,512
Intel Corp. 75,000 4,265,625
International Business Machines
Corp. 70,000 7,778,750
Microsoft Corp. (a) 152,700 15,747,188
Oracle Systems Corp. (a) 201,950 9,516,894
Pitney Bowes, Inc. 180,000 8,820,000
3Com Corp. (a) 75,000 2,990,625
Xerox Corp. 42,000 5,271,000
-------------
97,611,013
-------------
Construction (0.9%)
Foster-Wheeler Corp. 125,000 5,546,875
Masco Corp. 95,000 2,755,000
-------------
8,301,875
-------------
Consumer Products (1.2%)
Gucci Group NV ADR (a) 35,000 1,680,000
Nike, Inc., Class B 31,700 2,575,625
Consumer Products (continued)
Unilever NV ADR 50,000 $6,787,500
-------------
11,043,125
-------------
Cosmetics & Toiletries (1.9%)
Avon Products, Inc. 151,700 13,008,275
Gillette Co. 80,000 4,140,000
-------------
17,148,275
-------------
Diversified (4.3%)
American Standard Co., Inc. (a) 58,000 1,696,500
Cooper Industries, Inc. 84,000 3,276,000
Corning, Inc. 182,000 6,370,000
General Electric Co. 100,000 7,787,500
Hanson PLC ADR 300,000 4,500,000
Minnesota Mining & Manufacturing
Co. 79,800 5,177,025
Parker-Hannifin Corp. 142,500 5,343,750
Whitman Corp. 200,000 4,850,000
-------------
39,000,775
-------------
Drugs & Health Care (11.2%)
American Home Products Corp. 9,500 1,029,563
Amgen, Inc. (a) 136,800 7,951,500
Boston Scientific Corp. (a) 45,000 2,070,000
Bristol-Myers Squibb Co. 70,000 5,993,750
Cardinal Health, Inc. 80,900 5,197,825
Ciba-Geigy AG ADR 99,200 6,200,000
Columbia/HCA Healthcare Corp. 104,900 6,057,975
Elan Corp. ADR (a) 30,000 1,927,500
HEALTHSOUTH Corp. (a) 85,000 2,890,000
Johnson & Johnson 60,000 5,535,000
Medtronic, Inc. 88,000 5,247,000
Merck & Co., Inc. 157,500 9,804,375
Oxford Health Plans, Inc. (a) 40,000 3,510,000
Pfizer, Inc. 100,000 6,700,000
Pharmacia & Upjohn, Inc. 152,975 6,099,878
Schering-Plough Corp. 125,000 7,265,625
St. Jude Medical, Inc. (a) 80,000 2,985,000
United Healthcare Corp. 132,500 8,148,750
Warner-Lambert Co. 60,000 6,195,000
-------------
100,808,741
-------------
Electrical Utilities (0.6%)
Pinnacle West Capital Corp. 170,000 4,908,750
-------------
Electronics & Electrical
Equipment (4.0%)
Adaptec, Inc. (a) 53,900 2,600,675
Analog Devices, Inc. (a) 70,000 1,960,000
Arrow Electronics, Inc. (a) 135,000 6,345,000
General Motors Corp., Class H 48,800 3,086,600
Grainger (W.W), Inc. 27,000 1,812,375
Honeywell, Inc. 33,000 1,823,250
Molex, Inc. 39,062 1,249,984
Raytheon Co. 246,000 12,607,500
Stratacom, Inc. (a) 56,700 2,076,637
Tyco International Ltd. 65,000 2,323,750
-------------
35,885,771
-------------
Financial Services (5.9%)
Countrywide Credit Industries, Inc. 140,000 3,097,500
CUC International, Inc. (a) 60,000 1,755,000
Federal Home Loan Mortgage Corp. 140,000 11,935,000
12
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Schedule of Investments (continued)
Common Stocks-continued
Financial Services (continued)
Federal National Mortgage Assoc. 220,000 $7,012,500
First USA, Inc. 60,000 3,397,500
Green Tree Financial Corp. 62,800 2,158,750
H & R Block, Inc. 100,000 3,612,500
MBNA Corp. 180,000 5,332,500
Morgan Stanley Group, Inc. 120,000 6,210,000
Paychex, Inc. 20,000 1,170,000
Travelers Group, Inc. 110,000 7,260,000
-------------
52,941,250
-------------
Food & Beverage (1.8%)
Dole Foods, Inc. 120,000 4,620,000
McCormick & Co., Inc. 135,000 2,970,000
Nabisco Holdings Corp. 105,000 3,438,750
PepsiCo, Inc. 85,900 5,433,175
-------------
16,461,925
-------------
Hotels & Leisure (2.2%)
Brunswick Corp. 210,000 4,830,000
Hasbro, Inc. 119,000 4,403,000
HFS, Inc. (a) 90,000 4,376,250
Walt Disney Co. 92,419 5,903,264
-------------
19,512,514
-------------
Industrial Equipment (0.9%)
Crown Cork & Seal Co., Inc. 20,000 975,000
Dover Corp. 154,000 7,045,500
-------------
8,020,500
-------------
Insurance (8.4%)
Aetna Life & Casualty Co. 34,500 2,604,750
AFLAC, Inc. 225,000 7,031,250
Allstate Corp. 73,500 3,096,188
American International Group, Inc. 91,750 8,590,094
Aon Corp. 101,450 5,250,038
Cigna Corp. 28,100 3,210,425
EXEL Limited 125,000 8,625,000
Marsh & McLennan Companies, Inc. 84,000 7,801,500
MBIA, Inc. 63,000 4,725,000
MGIC Investment Corp. 99,000 5,395,500
PMI Group, Inc. 20,000 872,500
Progressive Corp. (a) 134,000 5,979,750
Providian Corp. 140,000 6,247,500
Transamerica Corp. 85,000 6,364,375
-------------
75,793,870
-------------
Metals & Mining (0.8%)
Freeport-McMoRan Copper & Gold,
Inc., Class A 175,000 5,534,375
Potash Corp. of Saskatchewan, Inc. 30,100 1,881,250
-------------
7,415,625
-------------
Oil & Gas (7.5%)
Amerada Hess Corp. 45,500 2,502,500
Burlington Resources, Inc. 123,000 4,566,375
Elf Aquitaine SA ADR 48,924 1,657,300
Enron Corp. 45,000 1,659,375
Exxon Corp. 100,000 8,162,500
Mobil Corp. 40,100 4,646,588
Repsol SA ADR 184,700 6,903,162
Royal Dutch Petroleum Co. ADR 93,100 13,150,375
Schlumberger Ltd. 24,500 1,938,562
Tenneco, Inc. 91,200 5,095,800
Triton Energy Corp. (a) 150,000 8,362,500
Oil & Gas (continued)
Union Texas Petroleum Holdings,
Inc. 200,000 $3,950,000
USX Marathon Group 234,800 4,519,900
-------------
67,114,937
-------------
Paper (4.1%)
Alco Standard Corp. 50,000 2,606,250
Avery Dennison Corp. 96,000 5,184,000
Champion International Corp. 120,000 5,430,000
International Paper Co. 122,200 4,811,625
Kimberly-Clark Corp. 173,556 12,929,922
Union Camp Corp. 129,600 6,431,400
-------------
37,393,197
-------------
Photographic Equipment &
Supplies (0.7%)
Eastman Kodak Co. 92,200 6,546,200
-------------
Pollution Control (0.7%)
Browning Ferris Industries, Inc. 165,900 5,225,850
Republic Industries, Inc. (a) 40,000 1,255,000
-------------
6,480,850
-------------
Publishing (3.1%)
American Greetings Corp. 353,000 9,751,625
Gannett Co., Inc. 84,300 5,669,175
McGraw-Hill Cos., Inc. 33,000 2,862,750
R. R. Donnelley & Sons Co. 100,000 3,450,000
Readers Digest Assoc., Inc.,
Class A 138,000 6,520,500
-------------
28,254,050
-------------
Retail Trade (4.2%)
American Stores Co. 213,800 7,055,400
AutoZone, Inc. (a) 70,000 2,371,250
Dayton Hudson Corp. 68,000 5,771,500
Federated Department Stores,
Inc.(a) 95,700 3,086,325
Home Depot, Inc. 47,300 2,264,487
May Department Stores Co. 260,000 12,545,000
Office Depot, Inc. (a) 114,000 2,237,250
Safeway, Inc. (a) 96,100 2,738,850
-------------
38,070,062
-------------
Services (0.6%)
Service Corp. International 110,000 5,362,500
-------------
Telecommunications (5.3%)
AT&T Corp. 82,900 5,077,625
MCI Communications Corp. 181,400 5,487,350
Motorola, Inc. 113,000 5,989,000
Nokia Corp. ADR 110,000 3,767,500
Sprint Corp. 180,000 6,840,000
Telefonakteibolaget LM Ericsson,
Class B, ADR 516,000 11,029,500
U.S. Robotics Corp. (a) 52,200 6,746,850
WorldCom, Inc. (a) 51,600 2,373,600
-------------
47,311,425
-------------
Transportation (2.2%)
AMR Corp. (a) 60,000 5,370,000
Burlington Northern, Inc. 71,500 5,871,938
Southwest Airlines Co. 76,100 2,254,462
Union Pacific Corp. 94,300 6,471,337
-------------
19,967,737
-------------
Total Common Stocks
(Cost $620,644,761) 871,790,227
-------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C>
Commercial Paper (2.2%)
American Express Credit Corp. 5.20% 04/04/96 $4,000,000 $ 4,000,000
Chevron Oil Finance Co. 5.37 04/02/96 1,000,000 999,851
Cooperative Associate Tractor Dealer 5.25 04/04/96 3,000,000 2,998,687
Goldman Sachs Group LP 5.20 04/09/96 1,500,000 1,498,267
Nestle Capital Corp. 5.25 04/11/96 1,000,000 998,542
Pearson 5.27 04/12/96 2,000,000 1,996,779
PepsiCo, Inc 5.25 04/15/96 2,000,000 1,995,917
Prudential Funding 5.46 04/04/96 2,900,000 2,898,680
Student Loan Corp. 5.25 04/18/96 2,000,000 1,995,013
-----------
19,381,736
-----------
U.S. Government Security (0.7%)
U.S. Treasury Bill 5.27 04/04/96 6,500,000 6,497,384
-----------
Repurchase Agreement (1.0%)
Bankers Trust Securities Corp. dated 03/29/96, 5.50%, to be
repurchased at $9,374,295 on 04/01/96, collateralized by U.S.
Treasury notes with various maturities to 1998, with a current
market value of $9,577,270 9,370,000
-----------
Total Short-term Investments (Cost $35,249,120) 35,249,120
-----------
Total Investments (100.6%) (Cost $655,893,881) (b) 907,039,347
Other Assets and Liabilities, Net (-0.6%) (5,510,558)
-----------
Net Assets (100.0%) $901,528,789
===========
Net Asset Value Per Share (78,975,840 shares outstanding) $11.42
===========
Notes to Schedule of Investments:
(a) Non-income producing security.
(b) Gross unrealized appreciation and depreciation of investments at
March 31, 1996 is as follows:
Gross unrealized appreciation $259,447,191
Gross unrealized depreciation (8,301,725)
-----------
Net unrealized appreciation $251,145,466
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Acronym Name
------ -----------------------------
ADR American Depository Receipt
</TABLE>
Short-term Investments (3.9%)
Per Share Changes in Net Assets
<TABLE>
<CAPTION>
Three Months Ended Year Ended December 31,
March 31, 1996 ----------------------------------------------------
(Unaudited) 1995 1994 1993 1992 1991
------------------ ----- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $11.03 $ 9.26 $10.40 $10.78 $11.20 $ 8.92
----------------- --- ------ ------ ------ -----
Net investment income 0.02 0.10 0.11 0.12 0.16 0.17
Distributions declared (0.29) (1.04) (1.00) (1.07) (1.07) (1.02)
Change due to rights
offering (0.05)(a) (0.03)(a) (0.05)(a)
Net realized and
unrealized gain (loss)
on investments 0.66 2.71 (0.20) 0.78 0.54 3.13
Provision for Federal
income tax (0.18)
----------------- --- ------ ------ ------ -----
Net asset value at end of
period $11.42 $11.03 $ 9.26 $10.40 $10.78 $11.20
================= === ====== ====== ====== =====
(a) Effect of ALL-STAR's rights offering for shares at a price below net asset value.
</TABLE>
14
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Distribution Policy
Liberty ALL-STAR Equity Fund's current policy, in effect since 1988, is to
pay distributions on its common shares totaling approximately 10% of its net
asset value per year, payable in four quarterly installments 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 distribution date. The fixed distributions are
not related to the amount of ALL-STAR's net investment income or net realized
capital gains or losses. If, for any calendar year, the total distributions
required by the 10% pay-out policy exceed ALL-STAR'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 ALL-STAR's net investment income and net short-term and
long-term realized gains for any year exceed the minimum amount required to
be distributed under the 10% pay-out policy, ALL-STAR may, in its discretion,
retain and not distribute net long-term capital gains to the extent of such
excess.
15
