[Liberty logo] LIBERTY
ALL [star] STAR
E Q U I T Y F U N D
---------------------------------------
ANNUAL REPORT
-----------------------------
1995
<PAGE>
ALL [star] STAR: A Perspective
[box] Its Record
The inside of this fold-out begins with a statement of Liberty ALL-STAR
Equity Fund's (ALL-STAR or the Fund) long-term investment objectives,
followed by information to show how the Fund is faring.
[box] Its Uniqueness
ALL-STAR is distinct from other mutual funds because it is Multi-Managed,
using a methodology developed and conducted by the Fund Manager, Liberty
Asset Management Company (LAMCO).
When ALL-STAR was organized in 1986, both its uniqueness and LAMCO's
methodology were explained in the offering prospectus. Since then, there have
been continuing references to each in various shareholder communications.
In last year's Annual Report, we presented a full description of the
Multi-Management process. In light of the favorable response--and the fact
that there are many new shareholders among ALL-STAR investors--we are
repeating this special section on pages 4, 5 and 6.
Liberty Asset Management Company
<PAGE>
[start boxed material]
[Liberty logo] LIBERTY
ASSET MANAGEMENT COMPANY
Liberty ALL-STAR Equity Fund
Investment Objectives ...
[star] Above average long-term investment performance
[star] Greater consistency -- less risk
[end boxed material]
- -------------------------------------------------------------------------------
ALL-STAR'S Investment Performance and Consistency*
Compared with the Major Growth & Income Funds
Period: Past Nine Years
(This period, January 1987 through December 1995, reflects
performance since the first full year of investment operations.)
ALL-STAR's
high return
and high
consistency
combination
is well-placed
among the
universe of funds.
Return
12/86-
Fund Name 12/95 STD
--------- ------ ----
1 Affiliated 12.5% 3.6%
2 Alliance Growth & Income A 12.2% 3.2%
3 American Leaders A 12.2% 5.0%
4 American Mutual 12.4% 5.5%
5 Burnham A 10.5% 7.1%
6 Colonial A 11.8% 5.4%
7 Dean Witter Dividend Growth 12.9% 3.7%
8 Dreyfus 10.2% 5.1%
9 Federated Stock 11.6% 4.1%
10 Fidelity 13.9% 4.4%
11 Fidelity Growth & Income 17.0% 4.3%
12 Founders Blue Chip 12.5% 4.7%
13 FPA Paramount 15.6% 8.1%
14 Fundamental Investors 14.4% 3.6%
15 IDS Equity Select A 12.7% 4.3%
16 IDS Stock A 13.3% 3.3%
17 Investment Comp of America 13.3% 3.3%
18 Keystone Growth & Inc (S-1) 10.3% 3.1%
19 Lexington Growth & Income 14.5% 4.7%
20 Lutheran Brotherhood 11.0% 3.5%
21 MAS Value 14.6% 4.4%
22 Massachusetts Inv A 14.4% 2.5%
23 Merrill Lynch Basic Value A 13.1% 5.0%
24 Merrill Lynch Capital A 13.1% 5.2%
25 Mutual Qualified 15.0% 7.8%
26 Mutual Shares 14.8% 7.7%
27 Nationwide 13.0% 3.8%
28 Neuberger&Berman Guardian 15.2% 5.1%
29 New England Value A 11.3% 8.9%
30 Oppenheimer Total Return A 14.0% 6.4%
31 Penn Square Mutual 13.0% 3.2%
32 Pioneer 12.0% 4.1%
33 Pioneer II 11.5% 4.4%
34 Putnam Fund for Grth & Inc A 13.7% 4.4%
35 Salomon Bros Investors O 12.4% 3.2%
36 Scudder Growth & Income 13.5% 4.6%
37 Selected American 13.3% 5.9%
38 Seligman Common Stock A 12.1% 3.9%
39 Sentinel Common Stock 12.2% 2.9%
40 State St Research Invmnt C 12.9% 3.0%
41 Strong Total Return 10.3% 8.1%
42 T. Rowe Price Growth & Inc 12.3% 5.0%
43 Van Kampen Am Cap Comstock A 12.6% 3.9%
44 Van Kampen Am Cap Gr & Inc A 13.4% 5.3%
45 Vanguard/Windsor 12.7% 7.5%
46 Vanguard/Windsor II 13.6% 4.4%
47 Washington Mutual Investors 13.8% 3.9%
Liberty ALL-STAR 14.0% 3.3%
Each dot represents the precise return and consistency
of one fund in the universe of 47 Growth and Income
funds (as classified by both Morningstar, Inc. and Lipper
Analytical Services) that had at least $100 million in
assets at the beginning of the nine-year period.
*Consistency is measured by examining the volatility of "non-market"
monthly returns, calculated by subtracting the return of the S&P 500
Stock Index from each mutual fund's return. The lower the volatility,
the higher the consistency of results compared with the stock market.
<PAGE>
[boxed material]
Shareholders'
Investment Growth
December 31, 1995
To evaluate your
investment in
ALL-STAR, these
values should be
used. Each shows
how your investment
has fared by keeping
distributions at work
in the fund.
The upper value
includes additional
investments made
through rights
offering in 1992,
1993 and 1994.
Additional Investments $36.04
Made Through
Rights Offerings
Net Asset Value of $29.21
Shares Acquired
Through Dividend
Reinvestment
This is the
current net
asset value
of one share
of ALL-STAR.
Net Asset $11.03
Value of
One Share
[end boxed material]
For a table presenting year-by-year details for this graph, please refer to
"Shareholders' Investment Growth" on Page 10.
[boxed material]
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 2.648 shares as of December 31, 1995.
These shares have a total net asset value of $29.21. 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.
[end boxed material]
<PAGE>
- -----------------------------------------------------------------------------
Liberty ALL [star] STAR Equity Fund
1995 Annual Report
Chairman's Letter
To Our Fellow Shareholders: February 1996
The net asset value (NAV) of a common share of the Fund declined slightly
from $11.05 on September 30, 1995 to $11.03 on December 31, 1995, after
deducting the cash distribution of 28 cents paid to shareholders during the
quarter. The market price of a share of the Fund traded in a range from
$10.375 to $11.00 before closing the quarter at $10.875. The ending price
represented a discount to NAV of 1.4 percent compared with a discount to NAV
of 6.1 percent on September 30, 1995. Key investment results and comparisons
are noted in the box.
The stock market in 1995 was very rewarding. As the box shows, ALL-STAR's
full year return was 31.8%, which compares favorably with 30.6% for the
Lipper Growth and Income Average and 37.5% for the S&P 500. In absolute
terms, this performance is exceptional. This bullish market behavior was
supported by a number of factors including relatively low interest rates,
satisfactory corporate profits growth, low inflation, and burgeoning cash
flow into domestic equity mutual funds, to name a few. In fact, until the
budget impasse in Washington, a negative factor was hard to find. Some
pundits said conditions for a bull market could not be better. And it appears
they were right. This suggests caution.
Richard Christensen's President's letter which follows offers more detail,
and the Manager Roundtable reviews 1995 and looks into 1996, which will be
dominated by the political rhetoric surrounding a presidential election year.
But following such a great 1995, 1996 will certainly be a challenge for the
stock market.
The front cover fold-out shows that ALL-STAR continues to fulfill its stated
long-term investment objectives of above-average investment performance with
greater consistency, as it has done during the almost ten years of its
history. It has been my privilege to serve the Fund's shareholders during
that entire period as Chairman of its Board of Trustees. Now I will be
retiring effective with the April 17, 1996 Annual Shareholder's Meeting.
ALL-STAR's success through the years has been due, in part, to the diligent
contributions of an outstanding Board. That will continue as before, with the
addition of Harold W. Cogger, who has been nominated by the Board to fill the
vacancy created by my departure. It is expected
continued on page 2
*******************************[Boxed text]************************************
Fund Performance for the fourth
quarter and the full year. 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 Fourth Full
income. Quarter Year
- -----------------------------------------------------------------------------
Liberty ALL-STAR Equity Fund
Shares Valued at Net Asset Value 2.4% 31.8%
Shares Valued at Market Price
Reinvested 7.5% 41.4%
Lipper Growth & Income Mutual Fund
Average 4.5% 30.6%
S&P 500 Stock Index 6.0% 37.5%
Dow Jones Industrial Average 7.5% 36.8%
Fund's Closing Price Range $11 - 10-3/8 $11 - 8-1/2
Fund's Discount Range 1.1% to 6.4% 0.7% to 10.3%
*******************************************************************************
1
<PAGE>
- -----------------------------------------------------------------------------
Liberty ALL [star] STAR Equity Fund
Chairman's Letter
Continued from
Page 1
that Mr. Cogger will be elected Chairman subsequently. He is an experienced
investment professional who is Executive Vice President of Liberty Financial
Companies, Inc., the parent company of LAMCO, and President and Chief
Executive Officer of Colonial Management Associates, Inc., a large mutual
fund management company, also one of the Liberty Financial Companies. This
matter is discussed in the Proxy Statement which accompanies this Report.
Finally, I wish to thank you, my fellow shareholders, for your demonstrated
confidence since 1986 in ALL-STAR's unique multi-manager approach as
conducted by LAMCO. That approach continues to be validated by the long-term
record.
Sincerely,
/s/Richard I. Roberts
Richard I. Roberts
Chairman
Board of Trustees
Liberty ALL-STAR Equity Fund
2
<PAGE>
- -----------------------------------------------------------------------------
Liberty ALL [star] STAR Equity Fund
1995 Annual Report
President's Letter
To Our Fellow Shareholders: February 1996
As discussed in the preceding Chairman's letter, the stock market's advance
continued in the fourth quarter, although at a slower pace than in the prior
three quarters as measured by the S&P 500. For the full year, ALL-STAR's net
asset value return was exceeded only by that of 1991 in its nine year
history. One has to go back to 1958 to find a better year for the S&P 500 as
measured by percent total return.
Beneath these exceptional overall returns, the year was marked by
significant sector rotation, associated shifts in leadership between growth
and value styles and a general lack of reward to quality. In the Manager
Roundtable, the Portfolio Managers comment on each of these points.
After a lackluster 1994 in which the market finished with a weak fourth
quarter, value stocks started 1995 with a strong performance that produced
good results for ALL-STAR and the S&P 500. In the second and third quarters,
as interest rates fell, the market leadership shifted to growth stocks, and
in particular the technology sector, and growth stocks outperformed value
stocks. However, as the economy slowed in the fourth quarter the leadership
shifted back to value stocks as investors became apprehensive about earnings
projections for 1996. Growth stocks' performance deteriorated and value
stocks finished the year in strong fashion. This rotation between value and
growth was mitigated in ALL-STAR by the style diversification provided by the
multi-management approach. Investors were able to capture the movement in
both growth and value stocks without extreme volatility.
ALL-STAR was designed to be, and has been managed as, a core equity
investment for its shareholders, producing above-average long term investment
results at a below-average risk. The front cover fold out shows that these
objectives have been achieved. Core, in this context, means that investors
may view ALL-STAR as their basic domestic equity portfolio to which they may
add other investments seeking differing objectives. We continue to believe
ALL-STAR is well positioned for the future.
Sincerely,
/s/Richard R. Christensen
Richard R. Christensen
President
Liberty ALL-STAR Equity Fund and
Liberty Asset Management Company
3
<PAGE>
Why Multi-Management?
Even the Best Managers
Have Inconsistent Returns
Funds managed by one portfolio management organization, even a top one, tend
to produce inconsistent returns from one period to another. The graph
illustrates this inconsistency by showing the four best performing growth and
income funds in 1990 and tracking their relative performance rankings over
the next five years. The lack of consistency is clear. The problem is...
[typeset representation of line graph]
The Top-
Ranked
Funds 1990 1991 1992 1993 1994 1995 Ranking
- ----- ---- ---- ---- ---- ---- ---- among 169
Fund 1 1 160 130 135 6 168 Growth &
Fund 2 2 16 158 115 141 35 Income
Fund 3 3 30 144 147 3 18 Funds
Fund 4 4 58 92 146 110 117
A Single Style
Produces Inconsistency
...a professional portfolio manager practices the same specific investment
style through all types of market environments. For example, a growth stock
manager continues to hold growth stocks even when the stock market favors
other types of stocks. Therefore, as the stock market changes, a manager's
returns fluctuate relative to the stock market, as exhibited in this
simplified graph.
In order to reduce these fluctuations...
[typeset representation of wave chart]
Manager's Manager's
Style Style
in Favor in Favor
[wave runs up under in favor, down to out of favor, then back to in favor]
Stock Market Returns
- -----------------------------------------------------------------
Manager's
Style
out of Favor
Time -------------------------------------------------[arrow right]
[end wave chart]
Combining Styles
Through Multi-Management
Improves Consistency
...more than one portfolio manager, each employing a different style, must
manage a fund. This approach is called "Multi-Management" and is practiced in
some form by most large pension funds. This graph shows a simplified example
of Multi-Management using two diametrically different styles of management.
Notice the combined results produce what neither manager can give alone:
Consistency.
Of course, the investment performance from styles is not as predictable as
shown, so...
[typeset representation of wave chart]
Manager A's Manager B's Manager A's
Style Style Style
in Favor in Favor in Favor
solid line waves up to in favor, down to out of favor, then back to in favor
broken line waves down to out of favor, up to in favor, then down to out of
favor
Multi-Manager Returns (Manager A plus Manager B)
- -------------------------------------------------------------------------------
Stock Market Returns
- -------------------------------------------------------------------------------
Manager B's Manager A's Manager B's
Style out Style out Style out
of Favor of Favor of Favor
Time --------------------------------------------------------[arrow right]
[end wave chart]
4
<PAGE>
Multi-Management: ALL-STAR
and Liberty Asset Management Company
...LAMCO has identified five different styles as the best combination to
achieve ALL-STAR's investment objectives.
Three of the styles, representing 60 percent of the Fund's assets, are Value
styles, which focus on the selection of companies whose ratios of stock price
to estimated value are better than those of similar companies. The other two
styles, representing 40 percent of the assets, are Growth styles, which focus
on the selection of companies whose growth prospects are better than the
average company. Within these broad styles of Value and Growth are the
specific styles shown in the pie chart below.
In addition to producing greater performance consistency, ALL-STAR's other
objective is to produce above average return; and to fulfill that objective...
ALL-STAR's Multi-Manager Team
...LAMCO searches for successful, independent investment management
organizations to hire as Portfolio Managers for ALL-STAR. In researching and
selecting them, LAMCO focuses on managers who have:
[bullet] A demonstrated record of success.
[bullet] A constant focus on the desired Style.
[bullet] An organization that is well-managed.
[bullet] Highly qualified people who have built the record.
[bullet] A disciplined investment decision-making process.
There are several hundred equity management organizations which are both
substantial in size and well-qualified to manage large investment portfolios.
By applying a variety of analyses and disciplines, LAMCO today employs the
following five Portfolio Managers as ALL-STAR's team, which it considers to
be optimal for achieving ALL-STAR's investment objectives.
*****************************[Pie Chart]***************************************
Cooke & Bieler, Inc. 20%
Value -- companies with sound
fundamentals: seasoned, well-managed
and financially strong.
Oppenheimer Capital 20%
Value -- contrarian holdings
being overlooked and
undervalued by investors.
Columbus Circle Investors 20%
Growth -- companies whose
growing earnings are not fully
reflected in their share prices.
Provident Investment Counsel, Inc. 20%
Growth -- companies with fast
growing earnings and bright
prospects.
Palley-Needelman Asset Management, Inc. 20%
Value -- large capitalization companies
with attractive valuations, sound
fundamentals and above average dividend
income.
********************************************************************************
As with anything in investments, circumstances change, so...
5
<PAGE>
LAMCO's Multi-Management Process
...LAMCO conducts continuing evaluation of the Portfolio Managers. The
purpose is to be sure that each is still the best choice for ALL-STAR.
Through frequent meetings with the Portfolio Managers, and through
qualitative and quantitative analyses, each is continually evaluated to
assure that:
[bullet] It is consistently practicing its Investment Style.
[bullet] Its transactions and holdings reflect the Style.
[bullet] Its organization and investment process continue to support the
Style.
[bullet] Its investment performance is good when compared with other
managers using a similar Style.
Also, LAMCO is alert to assuring the proficiency of the Portfolio Manager
team. The objective is to be certain that the team remains an optimal
combination, giving ALL-STAR the full benefits of Multi-Management. The
procedures include:
[bullet] Assuring that ALL-STAR's total portfolio has the proper
investment characteristics.
[bullet] Researching new investment managers as possible future
Portfolio Managers.
[bullet] Making Portfolio Manager changes when necessary. Since ALL-STAR
began, four portfolio managers have been replaced.
Further, LAMCO shifts assets among the Portfolio Managers at selected times.
As the previous pie chart indicates, ALL-STAR's assets are allocated equally
among the five Portfolio Managers in order to provide the desired style
diversification. However, stock market action unbalances that equilibrium,
causing the allocation to become unequal. Accordingly, from time to time,
LAMCO reallocates assets back to equality in order to preserve the benefits
of ALL-STAR's Multi-Management methodology.
The anatomy of ALL-STAR's unique Multi-Management structure is visible in its
Portfolio Characteristics on the facing page. For reference, it is compared
with the S&P 500 Stock Index.
6
<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 ALL-STAR, 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.
Palley-Needelman Asset Management, Inc./Value--
Large capitalization companies with attractive valuations, sound fundamentals
and good prospects.
Oppenheimer Capital/Value--
Contrarian holdings being overlooked and undervalued by investors.
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
December 31, 1995 (unaudited) VALUE STYLES
-----------------------------
Cooke & Palley- Oppen-
Bieler Needelman heimer
------- -------- -------
Portfolio 1. Number of Holdings 33 38 30
2. Percent in Top Ten 44% 33% 47%
- ------------------------------------------------------------------------------
Size and Debt 3. Average Sales or Revenues
(billions) $13.0 $14.3 $12.5
4. Average Debt/Capital Ratio 23% 33% 50%
- ------------------------------------------------------------------------------
Profitability 5. Average Return on Total
Capital 20% 11% 13%
6. Average Return on Equity 23% 16% 22%
- ------------------------------------------------------------------------------
Growth 7. Average 5-Year Sales
Per Share Growth 8% 5% 14%
8. Average 5-Year Earnings
Per Share Growth 13% 19% 27%
- ------------------------------------------------------------------------------
Yield 9. Dividend Yield 2.5% 2.5% 1.6%
10. Average 5-Year
Dividend Payout Ratio 50% 51% 34%
- ------------------------------------------------------------------------------
Valuation 11. Average Price/Earnings Ratio 16.3x 15.8x 14.0x
12. Average Price/Book Value
Ratio 2.8x 2.4x 2.7x
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH STYLES
----------------------
Columbus Total S&P
Circle Provident ALL-STAR 500 Index
--------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Portfolio 1. Number of Holdings 47 51 165 500
2. Percent in Top Ten 35% 39% 15% 18%
--------------------------------------------------------------------------------------------------
Size and Debt 3. Average Sales or Revenues
(billions) $13.9 $6.9 $13.1 $23.0
4. Average Debt/Capital Ratio 25% 23% 33% 33%
--------------------------------------------------------------------------------------------------
Profitability 5. Average Return on Total
Capital 14% 17% 15% 14%
6. Average Return on Equity 19% 22% 20% 21%
--------------------------------------------------------------------------------------------------
Growth 7. Average 5-Year Sales
Per Share Growth 17% 20% 11% 10%
8. Average 5-Year Earnings
Per Share Growth 26% 27% 21% 20%
--------------------------------------------------------------------------------------------------
Yield 9. Dividend Yield 1.1% 0.6% 1.9% 2.3%
10. Average 5-Year
Dividend Payout Ratio 23% 15% 39% 46%
--------------------------------------------------------------------------------------------------
Valuation 11. Average Price/Earnings Ratio 23.4x 26.2x 16.9x 17.0x
12. Average Price/Book Value
Ratio 3.3x 5.3x 2.8x 3.0x
--------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Major Stock Changes in the
Fourth 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
fourth quarter of 1995.
Shares
----------------------------------
Held
Name Additions Reductions 12/31/95
- ------------------------------------- -------- --------- ---------
Aetna Life & Casualty Co. 34,500 34,500
American Telephone & Telegraph Co. 38,200 77,500
Hewlett-Packard Co. 40,400 105,400
Merck & Co., Inc. 68,200 216,200
Mobil Corp. 40,100 40,100
Nabisco Holding Corp. 140,000 140,000
Pfizer, Inc. 100,000 100,000
R.R. Donnelley & Sons Co. 100,000 100,000
United Healthcare Corp. 63,500 108,500
AirTouch Communications (104,700) 0
American General Corp. (110,000) 0
Amoco Corp. (58,300) 0
Becton, Dickinson & Co. (49,900) 0
Capital Cities/ABC, Inc. (35,400) 45,000
Citicorp (80,700) 130,000
Coltec Industries Inc. (300,000) 0
Cooper Industries, Inc. (115,000) 0
Deere & Co. (30,100) 0
Georgia-Pacific Corp. (37,400) 0
James River Corp. of VA (115,000) 0
Mercury Finance Co. (209,250)* 0
Motorola, Inc. (75,000) 75,000
Pacific Telesis Group (103,000) 0
Penney (J.C.) Co., Inc. (100,000) 0
Philips Electronics N.V. (110,000) 0
Texas Instruments, Inc. (50,000) 0
Wal-Mart Stores, Inc. (160,000) 0
*Adjusted for stock split
8
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Top 50
Holdings
As of
December 31, 1995
Rank
as of Value Percent of
Rank 9/30/95 Security Name ($000) Net Assets
- ----- ------ ------------------------------------------ ------ ----------
1 4 Monsanto Co. $14,847 1.7%
2 17 Merck & Co., Inc. 14,215 1.6
3 7 Royal Dutch Petroleum Co. ADR 13,139 1.5
4 2 Microsoft Corp. 12,873 1.5
5 31 First Data Corp. 11,919 1.4
6 11 Raytheon Co. 11,624 1.3
7 9 Avon Products, Inc. 11,434 1.3
8 10 Intel Corp. 11,066 1.3
9 13 McDonnell-Douglas Corp. 11,040 1.3
10 8 May Department Stores Co. 10,985 1.3
11 16 Federal Home Loan Mortgage Corp. 10,855 1.2
12 5 Ericsson (L.M.) Telephone Co. Class B ADR 9,844 1.1
13 86 Kimberly Clark Corp 9,736 1.1
14 12 Medtronic, Inc. 9,426 1.1
15 39 Computer Associates International, Inc. 9,336 1.1
16 18 Cisco Systems, Inc. 8,955 1.0
17 52 Hewlett-Packard Co. 8,827 1.0
18 1 Citicorp 8,743 1.0
19 21 American Greetings Corp. 8,647 1.0
20 26 Triton Energy Corp. 8,606 1.0
21 15 Oracle Systems Corp. 8,558 1.0
22 23 American International Group, Inc. 8,487 1.0
23 22 Pitney Bowes, Inc. 8,460 1.0
24 19 Amgen, Inc. 8,016 0.9
25 27 Exxon Corp. 8,013 0.9
26 64 The Boeing Co. 7,838 0.9
27 25 EXEL Limited 7,625 0.9
28 24 Marsh & McLennan Companies, Inc. 7,455 0.9
29 34 General Electric Co. 7,200 0.8
30 147 United Healthcare Corp. 7,107 0.8
31 28 Readers Digest Association, Inc. Class A 7,073 0.8
32 33 Unilever N.V. 7,038 0.8
33 38 Sprint Corp. 6,978 0.8
34 41 Travelers Group, Inc. 6,916 0.8
35 29 Union Camp Corp. 6,858 0.8
36 56 Schering Plough Corp. 6,844 0.8
37 30 Dover Corp. 6,711 0.8
38 36 Bank of New York, Inc. 6,684 0.8
39 58 Johnson & Johnson 6,653 0.8
40 44 State Street Boston Corp. 6,525 0.7
41 43 AFLAC, Inc. 6,506 0.7
42 42 Progressive Corp. 6,354 0.7
43 NEW Pfizer, Inc. 6,300 0.7
44 53 Sherwin-Williams Co. 6,276 0.7
45 71 Federal National Mortgage Association 6,206 0.7
46 70 Eastman Kodak Co. 6,177 0.7
47 73 Repsol S.A. ADR 6,072 0.7
48 40 Genuine Parts Co. 6,027 0.7
49 63 Bristol-Myers Squibb Co. 6,011 0.7
50 37 Pharmacia & Upjohn Inc.* 5,928 0.7
*Formerly Upjohn Co. -- name changed due to merger with Pharmacia.
9
<PAGE>
Shareholders'
Investment Growth
A report on per-share values,
distributions and reinvestment
since ALL-STAR's inception
<TABLE>
<CAPTION>
NAV(1) Price
Shares Shares Shares Shares Per Total Per
Owned Per Purchased Acquired Owned Share NAV Share Total
at Share Through Through at End at End of at End Price
Beginning Distri- Reinvestment Rights of of Shares of Shares
Year of Year butions Program Offering Year Year Owned Year Owned
- ------------ ------- ------ ---------- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140 $ 7.90 $ 9.01 6 $ 6.84
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1988 1.140 $0.64 .107 -- 1.247 $ 8.29 $10.34 7-1/4 $ 9.04
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1989 1.247 $0.95 .156 -- 1.403 $ 9.58 $13.44 8-1/4 $11.57
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1990 1.403 $0.90 .168 -- 1.571 $ 8.92 $14.01 7-3/4 $12.18
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1991 1.571 $1.02 .171 -- 1.742 $11.20 $19.51 10-3/4 $18.73
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1992 1.742 $1.07 .199 0.179(2) 2.120 $10.78 $22.85 11-1/8 $23.59
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1993 2.120 $1.25(5) .266 0.138(3) 2.524 $10.40 $26.25 11-1/8 $28.08
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1994 2.524 $1.00 .277 0.155(4) 2.956 $ 9.26 $27.37 8-1/2 $25.13
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
1995
1st Quarter 2.956 $0.24 .074 -- 3.030 $ 9.83 $29.78 9-5/8 $29.16
2nd Quarter 3.030 $0.25 .074 -- 3.104 $10.53 $32.69 10 $31.04
3rd Quarter 3.104 $0.27 .081 -- 3.185 $11.05 $35.19 10-3/8 $33.04
4th Quarter 3.185 $0.28 .082 -- 3.267 $11.03 $36.04 10-7/8 $35.53
- ------------ ----- ---- -------- ----- ---- ---- --- ---- -----
</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.
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 table above shows, an original share, including the rights offering
and dividend reinvestment shares, has grown to a net asset value of $36.04
(3.267 shares times the current $11.03 net asset value per share) and a
market price value of $35.53 (3.267 shares times the current $10.875 market
price per share). Excluding the rights offering shares, an original share has
grown to 2.648 shares. Thus, the original share has grown to a net asset
value of $29.21 (2.648 shares times the current $11.03 net asset value per
share) and a market price value of $28.80 (2.648 shares times the cur-
rent $10.875 market price per share).
10
<PAGE>
- -----------------------------------------------------------------------------
ALL[star]STAR
Manager Roundtable
1995 Was an Excellent Year And
1996 Holds Opportunities As Well
Their Views Vary but ALL-STAR's
Portfolio Managers Think Astute
Management and Good Stock
Selection Can Produce Rewards
in the Year Ahead
After an unrewarding stock market in 1994, investors approached 1995
cautiously. Twelve months later, they looked back on 1995 as one of the best
years for the stock market in some time. Now, investors are turning to
prospects for 1996, and once again are seeing cause for caution. This time,
their thoughts are focused on ways to keep the momentum going. ALL-STAR's
five Portfolio Managers recently analyzed 1995, and then took a look ahead at
what they see for 1996.
The Fund Advisor, Liberty Asset Management Company, serves as the moderator
of the Roundtable. The participating Portfolio Managers and their Investment
Styles are:
The views expressed in this Manager Roundtable represent the views of the
individual portfolio managers at the time of the roundtable discussion and
are subject to change.
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 earnings 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 start with a look back. Would each of you provide an in-depth
analysis of 1995, with emphasis on the fourth
continued on page 12
11
<PAGE>
Manager Roundtable
continued from page 11
quarter. Let's begin with the growth managers. Jeff Miller, will you please
begin?
Miller (Provident--Growth): The return of the stock market was driven by a
confluence of positive events. The Fed successfully engineered a "soft
landing" for the economy, allowing interest rates to decline (reversing
1994's increase) and price/earnings multiples to expand. In addition,
earnings for the stocks in the S&P 500 grew in the range of 17%--20% because
merger and restructuring activity trimmed operating expenses, technology
boosted employee productivity and acquisitions bolstered top-line growth.
While the market was strong overall, it was also characterized by severe
sector rotation. Few groups held leadership roles during the entire year.
Swift rotations in and out of sectors created a trading market biased to the
upside. Slow-growth, large capitalization stocks led the market during the
first few months of the year. During the second and third quarters, investors
rotated into high growth stocks, yielding superior performance for our
portfolio. The information technology and the specialty finance sectors were
major contributors to the portfolio's performance. During the final quarter
of the year, another rapid rotation occurred in which investors heavily sold
technology stocks and rotated back into large capitalization defensive
stocks. Our portfolio suffered due to this rotation, but still produced
strong results for the year.
.......................................
"While the market was strong overall,
it was also characterized by severe
sector rotation. Few groups held
leadership roles during the entire
year."
Jeff Miller
Provident
.......................................
Drug stocks, HMOs, entertainment and financial services stocks like Federal
National Mortgage Association and First Data performed well in the fourth
quarter. Retailers suffered from sluggish consumer spending and a weak
Christmas selling season. The technology sector was split, with software and
networking stocks holding up, while semiconductor issues declined as
investors took profits after three consecutive strong quarters.
Telecommunication stocks, such as Motorola and Nokia, suffered as U.S.
domestic cellular phone sales slowed dramatically in the fourth quarter. In
response to this environment, and in keeping with our disciplines, we have
sold stocks showing fundamental problems and have consistently taken profits
in many issues to reduce our exposure.
LAMCO: Thanks, Jeff. Irwin Smith, what are your views?
Smith (Columbus Circle--Growth): The year 1995 will go down as one of the
great years in the stock market. All of the following contributed to the
market's outstanding performance in 1995: interest rates fell steadily,
corporate profits increased, and inflation and economic growth remained
within investors' "comfort zone"--each near three percent.
After a strong first half, the second half of the year brought rotation
across sectors as the economy began to show signs of slowing. This rotation
consisted primarily of an exit from technology, with the majority of
investors seeking more defensive holdings--large capitalization, higher
quality, higher yielding and lower risk stocks. As a result strong
..........................................
"All of the following contributed to
the market's outstanding performance in
1995: interest rates fell steadily,
corporate profits increased, and
inflation and economic growth remained
within investors' "comfort zone"--each
near 3 percent."
Irwin Smith
Columbus Circle
..........................................
gains were posted in companies such as GE, Merck, Exxon, Johnson & Johnson
and Kimberly Clark.
Still, the most prominent sector for 1995 was technology, especially
semiconductors, semiconductor equipment and communications-related groups,
which was the best performer early in the year. Based on strong fundamentals,
especially relative to other slower-moving parts of the economy, investor
enthusiasm for the group ran near euphoric levels for most of the year.
Investors continued to purchase technology-related stocks so that most growth
managers had at least 30 percent in technology, with many of the specialty
mutual funds with significant cash inflow having 70-80 percent of their
investment in this sector.
In the latter part of the third quarter, technology stocks faded. They
continued to decline into the fourth quarter with an acceleration on the
downside as investors became concerned about the supply/demand relationship
of semiconductors.
12
<PAGE>
ALL [star] STAR
The increasing concern about potential weakness led to selling pressure which
was exacerbated as portfolio managers began to reduce their significant
exposure. At the end of the third quarter, we pared back our technology
weight and shifted the focus from more cyclical securities to those which
appeared to have better long-term growth potential.
Our best performing group, and one of the best in the market, remained
healthcare. Through the majority of the year, we maintained about 20 percent
of our portfolio in this sector, including hospital management companies,
HMOs, pharmaceutical and medical technology companies. These groups within
the healthcare universe benefited from continued improvement in fundamentals,
including a somewhat better pricing environment. In addition, increased
approvals of new drugs by the FDA allowed drug companies to bring more new
drugs to market much faster than anticipated.
We had about five percent of our portfolio invested in energy, broadly
defined to include natural gas-related companies, domestic and international
oils, and oil services. These groups did well in the fourth quarter, as
uncertainty in supply and demand forces suggested rising oil prices. Many
good reasons for investing in energy remain, but supply and demand worldwide
are in good balance and energy prices are expected to stay within a narrow
range. While there are some positive surprises within the sector, such as
somewhat higher-than-expected capital expenditures by the exploration
companies (which helps the oil service companies), there does not appear to
be enough positive surprises to make the energy sector a major theme for us.
Another sector that did fairly well is capital goods. Surprisingly, these
companies did well despite a weak economy. A closer look indicates that the
aerospace companies continued to restructure and improve the quality of
earnings through cost cutting and rationalizing those facilities acquired
through merger. Additionally, for example, Boeing was getting incremental
market share of a rising airline order inflow and this, of course, benefited
its many suppliers. Construction also did fairly well with the major driver
being lower interest rates, which people eventually think will flow into
incremental demand for housing and commercial development within the United
States and overseas. Again, restructuring and cheap valuations relative to
anticipated cash flow made these stocks attractive, especially in a lower
interest rate environment. Utilities also did well as a place to invest in a
declining interest rate environment, and amid concerns about the economic
future. Historically, we have not invested in this area as it is very
difficult to find companies that are accelerating earnings growth relative to
expectations.
So, 1995 was a good year for investors. Rotation among groups seemed more
sporadic than usual and thus changes made to capture positive surprises were
often late. The patience to capture both surprise and forward momentum of
secular trends often went unrewarded as investors moved from place to place,
attempting to enhance performance. We are certain, however, that focusing on
positive changes within companies and investing in those companies that are
exceeding expectations will continue to be rewarding in the long-term.
LAMCO: Let's turn to the value managers. Roger Palley, please begin.
............................................
"Last year witnessed one of the best
U.S. stock and bond market gains in this
half century. What was even more impressive
was the broad-based nature of the advances
and their consistency. Stocks were up
every month save October's three-tenths
of one percent decline..."
Roger Palley
Palley-Needelman
............................................
Palley (Palley-Needelman--Value): Last year witnessed one of the best U.S.
stock and bond market gains in this half century. What was even more
impressive was the broad-based nature of the advances and their consistency.
Stocks (as measured by the S&P 500 Index including income) were up every
month save October's three-tenths of one percent decline. Bond values
(including interest income) rose every month of the year.
While the technology sector was strong for much of the year, its relative
performance began to slow in the third quarter and worsened in the fourth
quarter. Still leading the market after the first nine months, the technology
sector fell behind financials and consumer staples in the fourth quarter,
finishing in third place for the year. Momentum players and latecomers to
this sector were hard hit in the latter months of the year, particularly if
they had exposure to the volatile semiconductor stocks. Our underexposure and
conservative approach to the technology stocks helped our relative
performance in the fourth quarter.
Continued on page 14
13
<PAGE>
Manager Roundtable
continued from page 13
Consumer cyclical stocks lagged most of the year, but our auto and housing
related issues picked up in the last quarter showing good relative
performance. The capital goods sector including our defense holdings had a
good year and an exceptional quarter. Overexposure to both these sectors was
a positive toward our good fourth-quarter performance.
Stocks rated A- or better by Standard & Poor's make up over 57 percent of
our portfolios compared to only 34 percent of the Russell 1000 Value Index.
High quality companies provide excellent downside protection during periods
of either economic or market malaise. Quality in general has not been
rewarded in portfolio performance since 1990, the last time we had a very
poor economic and market environment. This low quality outperformance
continued through the first half of 1995. There was a dramatic shift,
however, in the second half of the year as high quality stocks turned in the
best performance and low quality stocks lagged badly.
We expect this trend to continue in 1996 as earnings growth decelerates and
the economy exhibits a pattern of slow but steady growth.
We have long believed that exposure to high quality foreign stocks held in
the form of ADRs (American Depositary Receipts) helps the return in our
portfolio and creates added diversification, which dampens volatility. In
1995 most foreign stock markets lagged the strong U.S. market. Foreign stock
performance turned around, however, in the fourth quarter with a number of
our holdings such as Elf Aquitaine, Pharmacia & Upjohn, and Smithkline
Beecham gaining significantly more than the market. With the probability of
lower interest rates in many of these countries and some "catch up" to the
U.S. market, we believe this trend will continue in 1996.
....................................
"Clearly, there were many factors
that came together to create such an
ebullient environment....Basically,
the stock market stars were aligned
in 1995."
Jim McClennen
Cooke & Bieler
.....................................
LAMCO: Jim McClennen, how does Cooke & Bieler see 1995?
McClennen (Cooke & Bieler--Value): Nineteen ninety-five was an extraordinary
year for investing in the U.S. stock market. Clearly, there were many factors
that came together to create such an ebullient environment. Just to mention a
few: the economy and overall corporate profits grew consistently while
inflation remained virtually non-existent; long-term interest rates declined
dramatically; the level of corporate mergers and acquisitions reached new
highs; investors continued to put money into U.S. mutual funds at record
rates; and politicians focused on shrinking the budget deficit and size of
the central government, lowering taxes, and further deregulating the U.S.
economy. Basically, the stock market stars were aligned in 1995.
In the context of this market environment, I would make several comments
about 1995 and the fourth quarter as it relates to our investment style.
First, a market advance of the magnitude we saw compressed into relatively
short period of time certainly involved some degree of speculation. Anecdotal
evidence of speculative activity would include takeover frenzies in the
banking and entertainment industries, the exponential rise of Internet-
related stocks and a very high level of initial public offerings. Because we
consciously strive to maintain risk at a low level, the stocks in which we
invest usually lag the market when speculation becomes a factor. We feel this
occurred in 1995. Second, the dominance of technology stocks throughout most
of 1995 had an impact on our results. Many of these stocks tend to be highly
volatile and are therefore generally not suitable investments for our
portfolios given our low risk investment philosophy. Consequently, we are
usually under-weighted in this sector. This trend, however, reversed in the
fourth quarter as concerns surfaced about the near-term earnings outlook for
many technology companies. Third, our approach is to invest only in the
stocks of high quality companies. These are companies that are financially
strong, highly profitable, consistent performers and well-managed. Our data
suggest that there was virtually no distinction between high and low quality
stocks for the full year of 1995. In other words, average performance between
the groups was the same. This is consistent with a powerful market that
indiscriminately pushes stocks higher. Thus, our quality focus was not a
determining factor in our full year results. The same, however, cannot be
said for the fourth quarter in isolation. High quality stocks generally
outperformed low quality stocks by a fairly wide margin in the quarter and
our portfolios gained ground as a result. This was most likely precipitated
by concerns about technology companies' earnings and, perhaps to
14
<PAGE>
ALL [star] STAR
.................................
"The single most important factor
in the portfolio's performance in
1995 was the 200-basis point drop
in long term interest rates."
John Lindenthal
Oppenheimer
.................................
some degree, by measures taken to protect gains.
LAMCO: John Lindenthal, what is Oppenheimer's view on 1995?
Lindenthal (Oppenheimer--Value): The single most important factor in our
portfolio's performance in 1995 was the 200-basis point drop in long term
interest rates. We have had a longstanding view that financial stocks
represented the best values in the market regardless of the interest rate
environment, and accordingly, approximately one-third of our portfolio has
been invested in this sector. Financial stocks that outperformed the market
for the year included Federal Home Loan Mortgage Corp., Citicorp, Travelers,
Exel Ltd., Transamerica, Progressive Corp., AFLAC and Morgan Stanley. The
portfolio also benefited from the continuing restructuring of corporate
America. Five of our major holdings, McDonnell-Douglas, Monsanto, Sprint,
Freeport McMoRan and Dole Food, announced during the year that they would
sell or spin-off to shareholders a portion of their business.
During the fourth quarter our portfolio was negatively impacted by the short
term earnings disappointments in two technology related companies. Both
Motorola and Nokia announced a slowing in the rate of growth in the cellular
phone business. We continue to believe that these companies enjoy superior
industrial positions, generate high returns on capital and have attractive
reinvestment opportunities. We plan to add to these positions over the course
of 1996.
LAMCO: Most investors are a little cautious about the stock market's
prospects for 1996. John Lindenthal, what is Oppenheimer's view of the stock
market for 1996?
Lindenthal (Oppenheimer--Value): We think the probabilities favor modest
market gains in 1996. While the outlook for inflation remains positive
because of responsible monetary policies, global competition and the benefits
of the information revolution, earnings disappointments will become more
prevalent after five consecutive years of growth and expanding margins. We
expect S&P 500 earnings to be flatish compared to an increase of about 15
percent in 1995, making stock selection even more important. With stocks at
much higher levels and earnings growth more subdued, increased volatility is
probably in store. Even the long-term positive of a cut in the capital gains
tax could be a short-term negative if it triggers selling postponed into
1996.
..................................
"We expect S&P 500 earnings to
be flat compared to an increase
of about 15 percent in 1995,
making stock selection even more
important. With stocks at much
higher levels and earnings growth
more subdued, increased volatility
is probably in store."
John Lindenthal
Oppenheimer
..................................
However, we do not foresee the ingredients for a major bear market,
especially if inflation and short-term rates move lower as now appears
likely. Further, the environment for capital is favorable. Individuals have
responded to lower interest rates by shifting a larger portion of their total
assets to financial instruments. However, we believe the big increment to
demand for stock will come from corporations. Mergers and acquisitions soared
to $450 billion last year and we look for a continuation of this activity
into 1996. Also, many corporations continue to buy back their own stock. As
usual, a challenging year lies ahead and the key to success will be superior
stock selection.
LAMCO: Jim McClennen, what does Cooke & Bieler see ahead?
McClennen (Cooke & Bieler--Value): We believe there is reason to be cautious
about the stock market in 1996. First, history suggests that a period of
consolidation is likely to follow the dramatic surge we saw in 1995. Going
back 50 years, every year the market increased more than 30 percent, a flat
or down year ensued within three years. Frequently, the weak market occurred
the following year. At the same time, we recognize that 1996 is an election
year and that unusual forces could work to support the market. Second, it
seems unlikely to us that the investment environment can get more favorable
for stocks than it was in 1995. In fact, a deterioration at the margin in
some of the key factors that influence the stock market is more plausible to
us. Finally, because the market's valuation is extended in our view, even a
continuation of the ideal conditions we had in 1995
Continued on page 16
15
<PAGE>
.........................................
"...low quality stocks have outperformed
high quality stocks since 1992. As a
result, high quality stocks now represent
particularly good values...high quality
stocks typically perform relatively well
in a flat or down market. Thus, we would
expect our portfolio of high quality,
low risk equities to perform relatively
well in 1996 should a weak market
materialize."
Jim McClennen
Cooke & Bieler
.........................................
Manager Roundtable
continued from page 15
is unlikely to evoke a major positive response from the stock market in the
short term. Further, we believe that the market's current valuation reflects
a high degree of investor optimism and would not expect valuations to offer
much support in the event that investors realize their outlook is overly
optimistic.
One additional comment I would like to make is that we feel that the stocks
of high quality companies are currently very attractive for several reasons.
First, low quality stocks have outperformed high quality stocks since 1992.
As a result, high quality stocks now represent particularly good values.
Second, high quality stocks typically perform relatively well in a flat or
down market. Thus, we would expect our portfolio of high quality, low risk
equities to perform relatively well in 1996 should a weak market materialize.
LAMCO: Roger Palley, what is your outlook for 1996?
Palley (Palley-Needelman--Value): We look for 1996 to be a good year for our
style. We believe high quality stocks will continue their recent
outperformance and that our foreign holdings will add to relative performance
this year. The general market is currently focusing on earnings, interest
rates and the budget. While decelerating earnings growth may be a short-term
"Achilles' heel" for the market, the likelihood of positive earnings growth
in both 1996 and 1997 should help push the market higher. The S&P 500 is
currently selling at about 17 times 1995 earnings, which is not excessive in
the current low interest rate environment. The economy appears to be growing
at a slow but steady pace, and even without a budget agreement we could see
more Fed easing this year. The probability of lower rates in the U.S. and
abroad could be a positive catalyst to stock prices in 1996.
..................................
"We look for 1996 to be a good
year for our style. We believe
high quality stocks will continue
their recent outperformance and
that our foreign holdings will
add to relative performance
this year."
Roger Palley
Palley-Needelman
..................................
LAMCO: Thank you. Jeff Miller, please give us your outlook for 1996.
Miller (Provident--Growth): Looking ahead, we remain optimistic on the
prospects for growth stocks. A slowing economic environment should result in
growth stocks achieving superior growth in earnings relative to their
cyclical counterparts. The companies in the portfolio are involved in a wide
range of industries but they all have one common ingredient. They all have
excellent growth prospects that in aggregate should show about 25 percent
earnings growth in both 1996 and 1997.
We also believe that both communication and technology are secular growth
areas which will become larger percentages of the GDP. We have retained
certain investments in these areas because of the strong prospects that
abound in the networking, client server, and the database arenas. Core
holdings include Cisco, Hewlett-Packard, Computer Associates, Oracle and
Informix. In addition to the information technology sector, the portfolio is
invested in a wide range of industries that are a result of bottom-up
stock-picking. These industries range from healthcare to specialty finance to
business services.
We have always remained focused on the earnings and revenue growth of the
entire portfolio and it continues to look extremely bright. We expect 25
percent plus portfolio earnings growth on average versus a much lower
expectation of only 5-10 percent earnings growth for the S&P 500 in 1996.
Valuation levels are still very attractive, despite the excellent price
performance this year. On average our portfolio is selling at a discount to
its growth rate when compared to the S&P 500, providing excellent
opportunities for 1996. As we have seen at many other similar times in the
past, investors are rewarded for staying with these high quality stocks as
the market rotates toward companies with rapidly growing earnings and
revenues.
LAMCO: Thank you, Jeff. Irwin Smith, please continue with your outlook for
1996.
16
<PAGE>
ALL [star] STAR
....................................
"... we remain optimistic on the
prospects for growth stocks....the
companies in the portfolio are
involved in a wide range of
industries but they all have one
common ingredient....growth
prospects that in aggregate should
show about 25 percent earnings
growth in both 1996 and 1997."
Jeff Miller
Provident
....................................
Smith (Columbus Circle--Growth): With the economy weak, sales and revenues
going forward are likely to be weak as well. Corporate profits will therefore
be more difficult to achieve, and thus we will quite likely invest more in
companies which are significantly restructuring, or where a merger or
acquisition provides incremental opportunities for cost savings and more
efficient operations. Additionally, the potential for decline in profits and
cash flow suggests that the quality of the company, the capabilities of
management and the strength of its financial position will become more
important. Those companies with good balance sheets and efficient operations
should be able to enhance their competitive position relative to those less
well capitalized or managed.
...................................
"...we will quite likely invest
more in companies which are
significantly restructuring, or
where a merger or acquisition
provides incremental opportunities
for cost savings and more efficient
operations."
Irwin Smith
Columbus Circle
...................................
At year-end, our portfolio continues to be about 20 percent invested in
technology, down from 30 percent four or five months ago. With the themes
within technology moving away from semiconductors, personal computers and
cellular development, our focus will turn instead toward those companies
benefiting from the Internet, either as a provider of services to the user or
to those companies enhancing its efficiency and capabilities. Healthcare is
also about 20 percent of our portfolio and has been a beneficiary of positive
demographics, positive events at the FDA, less pressure on pricing and the
inefficiencies of the not-for-profit hospitals. We expect this sector to
remain important in our portfolio, but recognize that the companies have
already done quite well in the marketplace.
At present, we have about 10 percent of the portfolio invested in financial
institutions including banks, mortgage companies and insurance companies.
There is not a strong rationale to either raise or lower our participation in
these companies at this time. Other themes in the portfolio, generally
comprising somewhere between 3-10 percent include: consumer staples, which
would likely rise if the economy continues to weaken; specialty retailing,
where the drivers will again relate to the consumer and specific company's
fundamentals; communications, specifically related to the restructuring of
the wireless and paging systems within the U.S.; energy and
agriculture-related companies benefiting from the increased demand for
efficient production throughout the world.
As we think about the outlook for 1996, we have noted that since we started
in business 20 years ago, the market has been down in only three years. In
those three years, the decline has been less than five percent. In 1975, we
were coming off a 40 percent decline in market value generated from the
over-valuations of the "nifty-fifty" stocks that fell materially in 1973 and
1974. In the early 1980s, we had short- and long-term interest rates in
excess of 15 percent. In recent years, we have taken interest rates from that
level to about 4.5 percent on the short rates and six percent on the long
rates. Both expanding price/earnings multiples and improving earnings have
driven the stock market for the last 15 years. Whether this can continue is
unclear, especially in an environment where the political leadership appears
to be weak, the consumer extended and a great many businesses less healthy
than they should be considering the length of the economic expansion and the
opportunities to improve their balance sheets that have occurred over the
last several years.
LAMCO: Thank you, Irwin. Now, perhaps we can discuss stocks that have been
added to the ALL-STAR portfolio and the reasons why they were purchased. Jeff
Miller, what have you added lately?
Miller (Provident--Growth): Recent buys include Paychex, which provides
computerized payroll accounting services, salary deposit services, automatic
payroll tax payment and human resource products and services to more than
186,000 small to medium size businesses nationwide. The long-term appeal of
Paychex is the fact that most national job growth has, historically, been
generated by smaller employers.
Continued on page 18
17
<PAGE>
..................................
"Recent buys include Paychex,
which provides computerized
payroll accounting services...
to more than 186,000 small to
medium size businesses nationwide.
The long-term appeal of Paychex
is the fact that most national
job growth has, historically,
been generated by smaller
employers."
Jeff Miller
Provident
..................................
Manager Roundtable
continued from page 17
This is Paychex' target market and this is where it has its greatest market
share. The company has very consistent top-line growth, which also appears to
be accelerating. Another driver for its revenue stream is new product
development. TaxPay, the company's automatic tax filing and payment service,
has now penetrated 50 percent of the company's existing client base and 70
percent of all new customers. Its new human resource division, providing a
variety of different products, is generating 50 percent revenue growth and
breaking into profitability with lots of upside leverage. As the company
continues to roll out new products its expense leverage is very high due to
the high profitability of add-on services. This should result in improving
margins and rapidly growing earnings.
Another new purchase includes Pfizer. Pfizer, as you know, is a major
producer of pharmaceuticals, hospital products, consumer products and other
specialty health and chemical products. The company is one of the fastest
growing major drug companies with 10 percent plus volume growth driven by new
products and also with minimal generic exposure. The company has a very
strong pipeline with six drugs in phase three clinical trials and eight more
expected to reach phase three in the next six to 12 months. This has been
brought about by an aggressive R&D program for the company. The company also
has over 75 percent of its sales under patent through the year 2000, with no
patents expiring over the next three years.
This company, along with other of the major drug companies, has increased
its margins and improved its profitability through an aggressive cost cutting
program. Other broader trends include the reduction in the amount of time it
takes to develop a new drug, another benefit of Pfizer's R&D program, as well
as the announced commitment by the FDA for faster regulatory reviews of new
drugs.
.................................
"United Healthcare is a recent
addition for us. The company
owns 16 HMOs and manages
another nine....improved margins
and increased subscriptions are
the drivers of this selection."
Irwin Smith
Columbus Circle
.................................
Finally, another area we are excited about is networking. One of our
holdings in this area is Cisco Systems. Cisco is a leading supplier of
multi-protocol and multi-media communications services, routers and network
management products. The company is recognized as one of the leading Internet
companies. We think this is an exciting way to play the Internet without
paying the multiples. This stock, along with others in its group, has been
beaten down in the fourth quarter, in spite of only positive fundamental
news. The industry is growing at 35-50 percent and Cisco has publicly stated
that it expects to grow at above industry rates. Its balance sheet is
outstanding with no debt and a significant amount of cash flow. The company
also generates significant free cash. The proprietary nature of Cisco's
products and services are evidenced by pretax margins and return on equity,
both of which have been over 40 percent for the past several years. We
believe this is another outstanding company and anticipate this being an
exciting area over the next several years.
LAMCO: Irwin Smith, what have you added to the portfolio recently?
Smith (Columbus Circle--Growth): United Healthcare is a recent addition for
us. The company owns 16 HMOs and manages another nine. While the pricing
environment for premiums was weak in 1995, indications for early 1996 are
exceeding expectations, going from flat-to-down to flat-to-up. Selling and
administrative costs are also lower. United's $1.59 billion acquisition of
MeraHealth will be additive to earnings and will improve operating margins.
New enrollments for January 1996 were surprisingly higher than expected.
Overall, improved margins and increased subscriptions are the drivers of this
selection.
Another stock we like is 3Com, a computer networking company that recently
acquired Chipcom. The acquisition, while initially dilutive, should be less
dilutive than expected because of the acceleration of growth in digital
switching and remote access revenues. Industry growth continues to be driven
by increased
18
<PAGE>
ALL [star] STAR
..................................
"We have been building positions
in Pitney Bowes and Hasbro. Both
are financially strong companies
that are astutely managed and have
leadership positions in their
respective industries."
Jim McClennen
Cooke & Bieler
..................................
networking and applications like Internet. The increased capabilities coupled
with the overall growth, and potential for growth, are the key factors in
this story.
LAMCO: Jim McClennen, please tell us what Cooke & Bieler likes.
McClennen (Cooke & Bieler--Value): We have been building positions in Pitney
Bowes and Hasbro. Both are financially strong companies that are astutely
managed and have leadership positions in their respective industries.
Importantly, we believe there are some changes taking place with these
companies that make their stocks particularly attractive relative to the
companies' longer term prospects.
In the case of Pitney Bowes, the leader in the postage meter and mailroom
facilities management markets in the U.S., we believe revenue growth is
accelerating on a sustainable basis due to management's renewed focus on the
highly profitable core franchise. Non-core businesses have been divested and
the company's external leasing business has been deemphasized. Financial and
management resources are increasingly being used to expand the core business
outside the U.S. as other countries rely more on market driven postal
systems. Further, management has invested to develop technologically advanced
postage meters and mailing systems. These products are stimulating demand for
Pitney's core businesses in the U.S. Finally, while increased revenue growth
is management's primary focus, cost containment is becoming a more important
aspect of the company's culture. Thus, we believe top-line growth will be
magnified at the bottom line.
Hasbro is the second largest toy manufacturer in the world and has a diverse
portfolio of well-recognized toys. Through the Milton Bradley and Parker
Brothers divisions, the company has an unassailable position in the board
games market. This business, which comprises over 50 percent of the company's
profits, is highly profitable and a relatively stable grower. The company's
Kenner division is a leader in marketing toys that are licensed from movie
studios. Finally, Hasbro competes in the infant/preschool market through its
Playskool division. We believe the company can strengthen its established
leadership positions by leveraging superior management talent, financial
strength, product line diversity, and global distribution capabilities.
Management restructured the company last year to support a strategy of
developing core brands on a global basis. A large part of the change involves
approaching the business from a consumer product marketing perspective.
Longer term, we expect to see Hasbro's core products generate more consistent
and profitable growth as a result. We began buying Hasbro shares late last
summer because we believed the stock did not accurately reflect these
positive changes and the company's very strong fundamental position and
growth opportunities. The attractiveness of an investment in Hasbro became
more apparent when Mattel offered to acquire Hasbro shares at a substantial
premium. While we were disappointed with and somewhat surprised by the
outcome, we believe the stock is currently very attractive given the
company's fundamental strength and the sense of urgency imposed on management
by recent events to enhance the company's value to shareholders.
LAMCO: John Lindenthal, what are couple of names that are new to your ALL-
STAR portfolio?
Lindenthal (Oppenheimer--Value): We added RR Donnelley, which is the world's
largest commercial printer and supplier of printing services, specializing in
catalogs, financial and computer documentation, phone directories and
magazines. The reasons for investment include: 1) the company's dominant
share in this high return business provides outstanding opportunities,
particularly in expanding technologies and global penetration; 2) an
energized management team incentivized to generate strong shareholder value;
3) Donnelley has recently retooled its operations and now enjoys the most
technologically advanced production facilities which will further boost its
market share and profitability.
We also added Countrywide Credit Industries to the portfolio. Countrywide
Credit is the nation's largest independent residential mortgage lender and
servicer. Countrywide Credit is a high return company with a large
competitive advantage operating in a fragmented market. The main points of
the case for Countrywide are: 1) the unique and differentiated
Continued on page 20
19
<PAGE>
.........................................
"Countrywide Credit is the nation's
largest independent residential mortgage
lender and servicer....it's a high
return company with a large competitive
advantage operating in a fragmented
market."
John Lindenthal
Oppenheimer
.........................................
Manager Roundtable
continued from page 19
low-cost approach to mortgage origination that Countrywide Credit began in
1974 and is exploiting today without any meaningful look-alikes; 2)
increasing cost efficiencies due to economies of scale in the servicing
operation; 3) ambitious and competitive owner-operators that manage the
company aggressively; 4) reasonable valuation at nine times economic
earnings.
LAMCO: Let's close the discussion with a comment from Roger Palley about
Palley-Needelman's recent purchases.
Palley (Palley-Needelman--Value): Kimberly Clark was acquired for the
portfolio through the purchase of Scott Paper Company last October. Scott had
announced its intention to be acquired by Kimberly in a stock swap. The
combined company will have leading market positions in many paper-based
consumer products such as facial tissues (Kleenex), paper towels, diapers
(Huggies), bathroom tissues, and feminine products (Kotex). Kimberly can use
Scott's European marketing expertise while Scott will benefit from Kimberly's
domestic manufacturing efficiencies. Other investors are already seeing the
advantages of the combination as the stock is up almost 30 percent since our
purchase in October.
Another recent purchase was Mobil Oil Corp., the world's third largest
energy company. Since taking over the helm in 1994, CEO Lucio Noto has
embarked on a number of restructuring and cost-cutting initiatives that
continue to add to profitability. The recent sale of the Hefty Trash Bag and
plastic business is just one example of the streamlining intentions of
current management. Another positive catalyst is senior management's built-in
motivation to improve the earnings and stock price. Management will earn
substantial bonuses if certain key profitability targets are met by 1998.
During the past 13 years, real oil prices have declined by over 70 percent.
Current supply/demand characteristics, however, point to a reversal of this
trend over the next decade. Strong growth in developing nations is one factor
leading to increased worldwide demand. Even a modest increase in oil prices
combined with Mobil's aggressive internal steps to improve profitability
should lead to strong earnings growth over the next five years.
...................................
"Kimberly Clark was acquired for
the portfolio through the purchase
of Scott Paper Company last October
....the combined company will have
leading market positions in many
paper-based consumer products...
investors are already seeing the
advantages of the combination as
the stock is up almost 30 percent
since our purchase in October."
Roger Palley
Palley-Needelman
...................................
20
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Schedule of
Investments
As of
December 31, 1995
Common Stocks (95.4%) Shares Market Value
- -----------------------------------------------------------------------
Aerospace (2.1%)
The Boeing Co. 100,000 $ 7,837,500
McDonnell-Douglas Corp. 120,000 11,040,000
-----------
18,877,500
-----------
Auto Parts (0.9%)
Eaton Corp. 40,000 2,145,000
Genuine Parts Co. 147,000 6,027,000
-----------
8,172,000
-----------
Banks (3.8%)
Bank of New York, Inc. 137,100 6,683,625
Chemical Banking Corp. 59,800 3,513,250
Citicorp 130,000 8,742,500
CoreStates Financial Corp. 130,000 4,923,750
State Street Boston Corp. 145,000 6,525,000
Wachovia Corp. 70,000 3,202,500
-----------
33,590,625
-----------
Broadcasting & Cable (2.0%)
British Sky Broadcasting Group PLC ADR 70,000 2,633,750
Cabletron Systems, Inc. (a) 40,000 3,240,000
Capital Cities/ABC, Inc. 45,000 5,551,875
Telecommunications Inc.
NE Liberty Media Group (a) 63,950 1,718,656
Viacom, Inc. (a) 86,000 4,074,250
-----------
17,218,531
-----------
Business Services (2.1%)
The Dun & Bradstreet Corp. 82,000 5,309,500
First Data Corp. 178,227 11,918,931
Fleet Financial Group, Inc. 41,500 1,691,125
-----------
18,919,556
-----------
Chemicals (2.8%)
The Lubrizol Corp. 123,000 3,428,625
Monsanto Co. 121,200 14,847,000
Sherwin-Williams Co. 154,000 6,275,500
-----------
24,551,125
-----------
Computers & Business Equipment (12.1%)
Applied Materials, Inc. (a) 129,800 5,110,875
Automatic Data Processing, Inc. 50,000 3,712,500
Ceridian Corp. (a) 20,000 825,000
Cisco Systems, Inc. (a) 120,000 8,955,000
Computer Associates International, Inc. 164,150 9,336,031
Computer Sciences Corp. (a) 40,000 2,810,000
General Motors Corp. Class E 72,700 3,780,400
Hewlett-Packard Co. 105,400 8,827,250
Informix Corp. (a) 87,100 2,613,000
Intel Corp. 195,000 11,066,250
See Notes to Schedule of Investments.
21
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Common Stocks (continued) Shares Market Value
- ----------------------------------------------------------------------
Computers & Business Equipment (continued)
International Business Machines Corp. 60,000 $ 5,505,000
LSI Logic Corp. (a) 92,200 3,019,550
Microsoft Corp. (a) 146,700 12,872,925
Oracle Systems Corp. (a) 201,950 8,557,631
Pitney Bowes, Inc. 180,000 8,460,000
3Com Corp. (a) 100,700 4,695,138
Xerox Corp. 39,000 5,343,000
-----------
105,489,550
-----------
Construction (0.8%)
Foster-Wheeler Corp. 125,000 5,312,500
MASCO Corp. 65,000 2,039,375
-----------
7,351,875
-----------
Consumer Products (1.5%)
Nike , Inc. 24,600 1,712,775
Unilever N.V. ADR 50,000 7,037,500
VF Corp. 85,500 4,510,125
-----------
13,260,400
-----------
Cosmetics & Toiletries (1.8%)
Avon Products, Inc. 151,700 11,434,388
The Gillette Co. 80,000 4,170,000
-----------
15,604,388
-----------
Diversified (3.0%)
American Standard Companies, Inc. (a) 58,000 1,624,000
Corning, Inc. 182,000 5,824,000
General Electric Co. 100,000 7,200,000
Minnesota Mining & Manufacturing Co. 79,800 5,286,750
Parker Hannifin Corp. 52,500 1,798,125
Whitman Corp. 200,000 4,650,000
-----------
26,382,875
-----------
Drugs & Health Care (11.3%)
Amgen, Inc. (a) 135,000 8,015,625
Bristol-Myers Squibb Co. 70,000 6,011,250
Cardinal Health, Inc. 30,000 1,642,500
Ciba-Geigy AG ADR 98,900 4,339,238
Columbia / HCA Healthcare Corp. 104,900 5,323,675
Healthsouth Corp. (a) 70,000 2,038,750
Johnson & Johnson 77,700 6,653,063
Medtronic, Inc. 168,700 9,426,113
Merck & Co., Inc. 216,200 14,215,150
Oxford Health Plans, Inc. (a) 30,000 2,216,250
Pfizer, Inc. 100,000 6,300,000
Pharmacia & Upjohn, Inc. 152,975 5,927,780
Schering Plough Corp. 125,000 6,843,750
Schlumberger Ltd. 24,500 1,696,625
SmithKline Beecham PLC ADR 65,000 3,607,500
St. Jude Medical, Inc. (a) 22,500 967,500
See Notes to Schedule of Investments.
22
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Common Stocks (continued) Shares Market Value
- ----------------------------------------------------------------------
Drugs & Health Care (continued)
United Healthcare Corp. 108,500 $ 7,106,750
Warner Lambert Co. 60,000 5,827,500
-----------
98,159,019
-----------
Electrical Utilities (0.6%)
Pinnacle West Capital Corp. 170,000 4,887,500
-----------
Electronics & Electrical Equipment (4.2%)
Analog Devices, Inc. (a) 50,000 1,768,750
Arrow Electronics, Inc. (a) 125,000 5,390,625
General Motors Corp. Class H 86,000 4,224,750
Glenayre Technologies, Inc. (a) 25,000 1,556,250
KLA Instruments Corp. (a) 29,300 763,631
Loral Corp. 134,000 4,740,250
Molex Inc. 39,062 1,196,274
Raytheon Co. 246,000 11,623,500
Stratacom Inc. (a) 23,900 1,756,650
Tyco International Ltd. 60,000 2,137,500
W.W.Grainger, Inc. 27,000 1,788,750
-----------
36,946,930
-----------
Financial Services (5.3%)
American Express Co. 85,000 3,516,875
Countrywide Credit Industries, Inc. 120,000 2,610,000
CUC International, Inc. (a) 32,000 1,092,000
Federal Home Loan Mortgage Corp. 130,000 10,855,000
Federal National Mortgage Association 50,000 6,206,250
First USA, Inc. 60,000 2,662,500
H&R Block, Inc. 53,000 2,146,500
MBNA Corp. 120,000 4,425,000
Morgan Stanley Group, Inc. 60,000 4,837,500
Paychex, Inc. 20,000 997,500
Travelers Group, Inc. 110,000 6,916,250
-----------
46,265,375
-----------
Food & Beverage (2.0%)
Dole Food, Inc. 120,000 4,200,000
McCormick & Co., Inc. 110,000 2,653,750
Nabisco Holding Corp. 140,000 4,567,500
PepsiCo, Inc. 102,400 5,721,600
-----------
17,142,850
-----------
Hotels & Leisure (1.6%)
Brunswick Corp. 150,000 3,600,000
Disney (Walt) Co. 51,900 3,062,100
Hasbro, Inc. 110,000 3,410,000
HFS, Inc. (a) 45,000 3,678,750
-----------
13,750,850
-----------
See Notes to Schedule of Investments.
23
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Common Stocks (continued) Shares Market Value
- ---------------------------------------------------------------------
Industrial Equipment (0.8%)
Dover Corp. 182,000 $ 6,711,250
----------
Insurance (8.2%)
Aetna Life & Casualty Co. 34,500 2,389,125
AFLAC, Inc. 150,000 6,506,250
American International Group, Inc. 91,750 8,486,875
Aon Corp. 101,450 5,059,819
The Chubb Corp. 30,000 2,902,500
Cigna Corp. 34,600 3,572,450
EXEL Limited 125,000 7,625,000
Marsh & McLennan Companies, Inc. 84,000 7,455,000
MBIA, Inc. 63,000 4,725,000
MGIC Investment Corp. 94,000 5,099,500
PMI Group 20,000 905,000
Progressive Corp. 130,000 6,353,750
Providian Corp. 104,000 4,238,000
Transamerica Corp. 80,000 5,830,000
----------
71,148,269
----------
Metals & Mining (1.2%)
Freeport-McMoRan Copper & Gold Inc. Class A 83,333 3,083,321
Freeport-McMoRan Inc. 175,000 4,921,875
Potash Corp. Saskatchewan Inc. 33,000 2,338,875
----------
10,344,071
----------
Oil & Gas (7.5%)
Amerada Hess Corp. 34,700 1,839,100
British Petroleum PLC ADR 22,312 2,278,612
Burlington Resources, Inc. 104,000 4,082,000
Elf Aquitaine Inc. ADR 48,924 1,797,957
Enron Corp. 90,000 3,431,250
Exxon Corp. 100,000 8,012,500
Mobil Corp. 40,100 4,491,200
Repsol S.A. ADR 184,700 6,072,012
Royal Dutch Petroleum Co. ADR 93,100 13,138,738
Tenneco, Inc. 61,200 3,037,050
Triton Energy Corp. (a) 150,000 8,606,250
Union Texas Petroleum Holdings, Inc. 200,000 3,875,000
USX Marathon Group 224,800 4,383,600
----------
65,045,269
----------
Paper (3.8%)
Alco Standard Corp. 50,000 2,281,250
Avery Dennison Corp. 96,000 4,812,000
Champion International Corp. 120,000 5,040,000
International Paper Co. 112,200 4,249,575
Kimberly Clark Corp. 117,656 9,736,034
Union Camp Corp. 144,000 6,858,000
----------
32,976,859
----------
See Notes to Schedule of Investments.
24
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Common Stocks (continued) Shares Market Value
- -----------------------------------------------------------------------------
Photographic Equipment & Supplies (0.7%)
Eastman Kodak Co. 92,200 $ 6,177,400
-----------
Pollution Control (0.5%)
Browning-Ferris Industries, Inc. 155,900 4,599,050
-----------
Publishing (3.2%)
American Greetings Corp. 313,000 8,646,625
Gannett Co., Inc. 84,300 5,173,912
McGraw Hill, Inc. 33,000 2,875,125
R.R. Donnelly & Sons Co. 100,000 3,937,500
Readers Digest Association, Inc. Class A 138,000 7,072,500
-----------
27,705,662
-----------
Real Estate (0.1%)
Castle & Cooke 40,000 670,000
-----------
Retail Trade (3.8%)
American Stores Co. 160,000 4,280,000
AutoZone, Inc. (a) 110,000 3,176,250
Dayton Hudson Corp. 58,000 4,350,000
Federated Department Stores (a) 95,700 2,631,750
May Department Stores Co. 260,000 10,985,000
Office Depot, Inc. (a) 180,900 3,572,775
Safeway, Inc. (a) 81,000 4,171,500
-----------
33,167,275
-----------
Rubber & Plastics (0.6%)
The Goodyear Tire and Rubber Co. 114,800 5,209,050
-----------
Services (0.6%)
Service Corp. International 110,000 4,840,000
-----------
Telecommunications (3.5%)
American Telephone & Telegraph Co. 77,500 5,018,125
Andrew Corp. (a) 40,000 1,530,000
Ericsson (L.M.) Telephone Co. Class B ADR 504,800 9,843,600
MCI Communications Corp. 154,400 4,033,700
Motorola, Inc. 75,000 4,275,000
Nokia Corp. ADR 149,000 5,792,375
Sprint Corp. 175,000 6,978,125
U.S. Robotics Corp. (a) 39,500 3,466,125
-----------
40,937,050
-----------
Transportation (1.8%)
AMR Corp. (a) 60,000 4,455,000
Burlington Northern Santa Fe Transportation, Inc. 71,500 5,577,000
Union Pacific Corp. 144,000 5,563,800
-----------
15,595,800
-----------
Total Common Stocks (Cost $599,887,035) 831,697,954
-----------
See Notes to Schedule of Investments.
25
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Short-term Interest Maturity Par Market
Investments (5.7%) Rate Date Value Value
- ------------------------------------------------------------------------------
Commercial Paper (3.2%)
American Express Credit Corp. 5.60% 01/03/96 $ 2,200,000 $ 2,199,316
Bell Atlantic Network Funding 5.65 01/26/96 1,000,000 996,076
Beneficial Corp. 5.83 01/11/96 2,500,000 2,495,951
Cooperative Assoc. Tractor Dealer 5.78 01/10/96 1,000,000 998,555
Cooperative Assoc. Tractor Dealer 5.72 01/16/96 1,500,000 1,496,425
Deutsche Bank Finance, Inc. 5.72 01/08/96 1,000,000 998,888
Goldman Sachs Group LP 5.77 01/03/96 2,500,000 2,499,199
Government Development Bank
for Puerto Rico 5.68 01/19/96 1,500,000 1,495,740
Nestle Capital Corp. 5.56 01/26/96 2,000,000 1,992,278
PepsiCo, Inc. 5.60 02/02/96 1,000,000 995,022
Prudential FDG Corp. 5.92 01/04/96 2,500,000 2,498,767
Prudential FDG Corp. 5.77 01/09/96 5,000,000 5,000,000
Siemens Corp. 5.57 01/22/96 1,500,000 1,495,126
Student Loan Corp. 5.75 01/16/96 2,500,000 2,494,010
-----------
Total Commercial Paper 27,655,353
-----------
U.S. Governmment Security (1.3%)
U.S. Treasury Bill 5.30 01/04/96 11,000,000 10,995,142
-----------
Repurchase Agreements (1.2%)
State Street Bank & Trust Co. dated 12/29/95, 5.00%,
to be repurchased at $10,536,851 on 01/02/96,
collateralized by $7,385,000 U.S. Treasury Bonds
at 9.875%, due 11/15/15, with a current market value
of $10,743,321 10,531,000
------------
Total Short-term Investments (Cost $49,181,495) 49,181,495
------------
Total Investments (101.1%) (Cost $649,068,530) (b) 880,879,449
------------
Other Assets and Liabilities, Net (-1.1%) (9,168,621)
------------
Net Assets (100.0%) $ 871,710,828
============
Net Asset Value Per Share (79,018,694 shares outstanding) $11.03
============
Notes to Schedule of Investments:
(a) Non-income producing security.
(b) The cost of investments for Federal income tax purposes
is $649,359,550.
Gross unrealized appreciation and depreciation
of investments at December 31, 1995 is as follows:
Gross unrealized appreciation $ 238,239,099
Gross unrealized depreciation (6,719,200)
------------
Net unrealized appreciation $ 231,519,899
============
Acronym Name
- ------- ---------------------------
ADR American Depository Receipt
See Notes to Financial Statements.
26
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
- ------------------------------------------------------------------------------
Statement
of Assets and
Liabilities
December 31, 1995
Assets:
Investment at market value
(Identified cost $649,068,530) $ 880,879,449
Cash 3,087
Receivable for investments sold 7,395,010
Dividends and interest receivable 1,123,801
Other assets 48,201
---------------
Total assets 889,449,548
---------------
Liabilities:
Payable for investments purchased 7,590,770
Distributions payable 9,391,675
Management fees payable 541,133
Administrative fee payable 135,283
Accrued expenses 79,859
---------------
Total liabilities 17,738,720
---------------
Net assets $ 871,710,828
===============
Net assets represented by:
Paid-in capital (unlimited number of shares of
beneficial interest without par value authorized,
79,018,694 shares outstanding) $ 631,046,550
Accumulated net realized gains on investments
less distributions 8,853,359
Net unrealized appreciation of investments 231,810,919
---------------
Total net assets applicable to outstanding shares
of beneficial interest ($11.03 per share) $ 871,710,828
===============
See Notes to Financial Statements.
27
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
- -------------------------------------------------------------------------
Statement of
Operations
For the year ended
December 31, 1995
Investment income:
Dividends $ 13,585,791
Interest 2,294,629
-------------
Total investment income 15,880,420
Expenses:
Management fees $ 5,896,342
Administrative fee 1,537,451
Custodian and transfer agent fee 475,020
Proxy and shareholder
communication expense 185,258
Printing expense 119,474
Legal and audit fees 59,389
Insurance expense 77,212
Trustees' fees and expense 42,072
Miscellaneous expense 90,364
-------------
Total expense 8,482,582
------------
Net investment income 7,397,838
Realized and unrealized gains on
investments:
Net realized gains on investments
transactions:
Proceeds from sales 458,707,569
Cost of investments sold 379,893,042
-------------
Net realized gains on
investment transactions 78,814,527
Net unrealized appreciation
of investments:
Beginning of year 100,823,142
End of year 231,810,919
-------------
Change in unrealized
appreciation-net 130,987,777
--------------
Net increase in net assets
resulting from operations $ 217,200,142
==============
See Notes to Financial Statements.
28
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Statement of
Changes in
Net Assets
Year Ended December 31,
-------------------------------
1995 1994
- ------------------------------------------------------------------
Operations:
Net investment income $ 7,397,838 $ 8,235,508
Net realized gains on
investment transactions 78,814,527 39,502,582
Change in unrealized
appreciation-net 130,987,777 (55,240,220)
------------- -------------
Net increase (decrease) in
net assets resulting
from operations 217,200,142 (7,502,130)
------------- -------------
Distributions declared from:
Net investment income (7,397,838) (8,235,508)
Net realized gains on
investments (72,731,982) (37,685,681)
Paid-in capital -- (25,433,673)
------------- -------------
Total distributions (80,129,820) (71,354,862)
------------- -------------
Capital transactions:
Increase in net assets from
capital share transactions 24,187,453 64,454,198
------------- -------------
Total increase (decrease)
in net assets 161,257,775 (14,402,794)
Net Assets:
Beginning of year 710,453,053 724,855,847
------------- -------------
End of Year $ 871,710,828 $ 710,453,053
============= =============
See Notes to Financial Statements.
29
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Financial
Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value
at beginning of year $ 9.26 $ 10.40 $ 10.78 $ 11.20 $ 8.92
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.10 0.11 0.12 0.16 0.17
Net realized and
unrealized gains (losses)
on securities 2.71 (0.20) 0.78(a) 0.54 3.13
Provision for Federal income tax -- -- (0.18) -- --
-------- -------- -------- -------- --------
Total from Investment Operations 2.81 (0.09) 0.72 0.70 3.30
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net
investment income (0.10) (0.12) (0.12) (0.18) (0.15)
Distributions from realized
capital gains (0.94) (0.52) (0.58) (0.66) (0.87)
Returns of Capital -- (0.36) (0.37) (0.23) --
-------- -------- -------- -------- --------
Total distributions (1.04) (1.00) (1.07) (1.07) (1.02)
-------- -------- -------- -------- --------
Change due to rights
offering (b) -- (0.05) (0.03) (0.05) --
-------- -------- -------- -------- --------
Net asset value at
end of year $ 11.03 $ 9.26 $ 10.40 $ 10.78 $ 11.20
======== ======== ======== ======== ========
Per share market value
at end of year $ 10.875 $ 8.500 $ 11.125 $ 11.125 $ 10.750
======== ======== ======== ======== ========
Total Investment Return for
Shareholders: (c)
Based on net asset value 31.8% (0.8%) 8.8% 6.9% 39.3%
Based on market price 41.4% (14.9%) 12.7% 14.9% 53.9%
Ratios and Supplemental Data
Net assets at end of year
(millions) $872 $710 $725 $665 $601
Ratio of expenses to average
net assets 1.06% 1.07% 1.08% 1.08% 1.16%
Ratio of net investment
income to average
net assets 0.92% 1.16% 1.08% 1.44% 1.66%
Portfolio turnover rate 54% 44% 72% 57% 72%
</TABLE>
(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.
See Notes to Financial Statements.
30
<PAGE>
LIBERTY ALL*STAR EQUITY FUND
Notes to
Financial
Statements
December 31, 1995
Note 1. Organization and
Accounting Policies
Liberty ALL-STAR Equity Fund (ALL-STAR or the Fund), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. ALL-STAR's investment objective is to seek total
investment return, comprised of long term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities. 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 preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results, if different,
are expected to be immaterial to the net assets of the Fund.
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 Board of 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 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 its 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. 1 8%, 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
year ended December 31, 1 995, $2 3 7,693 in rebates has been offset against
management fees of the Fund.
Note 3. Capital Transactions
During the year ended December 31, 1995, distributions in the amount of
$24,187,453 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
2,276,314 shares. In a rights offering commencing August 8, 1 994, 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,
1 994, 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.
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 debt
obligations for the year ended December 31, 1995 were $413,935,1 76 and
$458,707,569 respectively.
Note 5. Distributions to Shareholders
ALL-STAR currently has a policy of paying distributions on its common shares
totaling approximately 1 0% 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
31
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Notes to
Financial
Statements
(continued)
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. Reclassifications are made to the Fund's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations.
32
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Independent
Auditors'
Report
[KPMG logo] KPMG Peat Marwick LLP
The Board of Trustees and Shareholders
Liberty ALL-STAR Equity Fund
We have audited the accompanying statement of assets and liabilities of Liberty
ALL-STAR Equity Fund (the Fund), including the schedule of investments, as of
December 31, 1995, and the related statement of operations for the year then
ended, statements of changes in net assets for each of the years in the two-year
period then ended, and financial highlights for each of the years in the
five-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Liberty ALL-STAR Equity Fund as of December 31, 1995, and the results of its
operations for the year then ended, changes in its net assets for each of the
years in the two-year period then ended, and financial highlights for each of
the years in the five-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
33
<PAGE>
LIBERTY ALL [star] STAR EQUITY FUND
Tax
Information
(unaudited)
All 1995 distributions whether received in cash or
shares of ALL-STAR consist of the following: (1) ordinary
dividend income and (2) long-term capital gains
distributions.
Below is a table which details the percentage of each
1995 distribution for Federal income tax purposes.
For Corporate Shareholders
100% of the income dividends qualify for the 70%
dividend received deduction available for
corporations for the year ended December 31, 1995.
TAX STATUS OF 1995 DISTRIBUTIONS
ORDINARY INCOME
Net Short-term Long-term Return
Date Amount Investment Capital Capital of
Paid Per Share Income Gains Gains Capital
03/20/95 $0.24 20.08% 9.54% 70.38% --
06/19/95 0.25 19.28 9.16 71.56 --
10/10/95 0.27 -- -- 100.00 --
01/08/96 0.28 -- -- 100.00 --
34
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
35
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
36
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
LIBERTY ALL [star] 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
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*
James E. Grinnell*
Richard W. Lowry*
Richard I. Roberts
OFFICERS
Richard I. Roberts, Chairman, Board of Trustees
Richard R. Christensen, President
William R. Parmentier, Jr., Vice President
Peter L. Lydecker, Treasurer and Controller
John A. Benning, Secretary
*Member of the audit committee.
- --------------------------------------------------
[Liberty logo]
Printed with Soybean Inks
[recycle logo] Printed on Recycled Paper D/69m/11-95
