CHAIRMAN'S LETTER
................................................................................
To Our Fellow Shareholders: May 1997
The net asset value (NAV) of a common share of the Fund declined from
$11.95 on December 31, 1996 to $11.73 on March 31, 1997, after deducting the
distribution of 32 cents paid to shareholders during the quarter. The market
price of a share of the Fund traded in a range from $11.125 to $12.125 before
closing the quarter at $11.75. The ending price represented a premium to NAV of
0.2 percent compared with a discount to NAV of 5.9 percent on December 31, 1996.
Key investment results and comparisons are noted below.
As the table shows, the Fund's net asset value was up 0.8 percent,
which compares with 1.1 percent for the Lipper Growth & Income Mutual Fund
Average (the Fund's primary benchmark) and 2.7 percent for the S&P 500 Stock
Index. For the last 12 months, the Fund's net asset value (with dividends
reinvested) was up 15.5 percent compared with 15.5 percent for the Lipper
Average and 19.8 percent for the S&P 500.
================================================================================
First Quarter Latest 12 Months
- --------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND:
Shares Valued at Net Asset Value 0.8% 15.4%
Shares Valued at Net Asset Value
With Dividends Reinvested 0.8% 15.5%
Shares Valued at Market Price
With Dividends Reinvested 7.2% 16.2%
Fund's Closing Price Range $12.125 to $11.25 $12.125 to $9.75
Fund's (Discount)/Premium Range (9.2)% to 0.2% (9.2)% to 1.6%
Lipper Growth & Income Mutual Fund Average 1.1% 15.5%
S&P 500 Stock Index 2.7% 19.8%
Dow Jones Industrial Average 2.6% 20.3%
NASDAQ Composite Index (5.4)% 10.9%
Figures shown for the Fund and the Lipper Growth & Income Mutual Fund Average
are total returns, which include income, after deduction of fees and other
operating expenses. Figures shown for the unmanaged S&P 500 and Dow Jones
indices are total returns including income. Figures for the unmanaged NASDAQ
Index are total returns excluding income.
================================================================================
The stock market, as measured by the S&P 500, continued its advance
for the ninth quarter in a row, a string that has not been matched since the
market increased 11 consecutive quarters between the third quarter of 1962 and
the first quarter of 1965.
But the market was weak in the latter part of the quarter. The S&P
500, after peaking at 816.29 in mid-February, dropped 7.2 percent to close the
quarter at 757.12. A contributing factor was the widely anticipated Federal
Reserve Board's boost in short-term interest rates, which came to pass in late
March. Richard Christensen's President's letter, which follows, provides
additional perspective.
In February, Liberty Asset Management Company, the Fund Manager,
recommended, and the Board of Trustees approved, the hiring of a new Portfolio
Manager, Wilke/Thompson Capital Management, Inc., to replace Provident
Investment Counsel, Inc. effective March 1, 1997. Wilke/Thompson, a growth style
manager, invests in high-quality growth stocks across the market capitalization
spectrum.
Wilke/Thompson is the subject of the manager interview beginning on
page 8. Mark Thompson, Chief Investment Officer, discusses the firm's investment
philosophy and decision making process as well as particular stocks that are
representative of its style of investing.
Sincerely,
/s/ Harold W. Cogger
Harold W. Cogger
Chairman of the Board of Trustees
Liberty All-Star Equity Fund
Executive Vice President
Liberty Financial Companies, Inc.
1
<PAGE>
PRESIDENT'S LETTER
................................................................................
To Our Fellow Shareholders: May 1997
Just as last summer's market correction, the recent correction was
noteworthy mainly in the quickness of the rebound to new highs. The S&P 500
Stock Index peaked at 816.29 on February 18, dropped almost 79 points to a low
of 737.65 on April 11, then rose to a new high of 830.24 on May 5. So, the depth
of the correction was 9.6 percent over a period of less than two months, and
within less than four weeks the market was back to new highs.
The S&P 500 has not had a correction of 10 percent or more in the
nearly seven year period since 1990, the longest such period without such a
correction in the 41 year history of the Index. The bull market appears to
remain intact, but at these levels it is vulnerable to negative surprises in
corporate earnings, inflation, interest rates and political developments.
As was noted in our recent annual report, the investment returns of
shares of large companies were significantly greater than those of smaller
companies during 1996. That situation continued into the first quarter, as the
50 largest capitalization stocks in the S&P 500 were up 4 percent, while the
bottom 450 returned only 1.7 percent, and the NASDAQ Index, which contains over
5,000 stocks including much smaller companies than the S&P 500, declined 5.4
percent.
The S&P 500 Stock Index is weighted by market capitalization rather
than equally among all 500 stocks. The largest companies in the Index have
market capitalizations that are hundreds of times larger than those of the
smallest companies, so the returns of the largest companies disproportionately
influence the Index. Investment managers rarely own the largest stocks in
weights that are equal to the representation in the Index. In fact, managers are
more likely to balance their portfolio holdings across a broader capitalization
spectrum.
The superior performance of a narrow group of large capitalization
stocks, coupled with an underweighting of those issues by most managers, were
the major factors contributing to the fact that many funds underperformed the
S&P 500 in 1996 and so far in 1997. In fact, the return on the S&P 500 for the
first quarter of 1997 exceeded those of 87 percent of all mutual funds according
to Lipper Analytical Services, Inc., and only one of the domestic general equity
closed-end funds beat the S&P 500 during the first quarter.
The Fund's portfolio includes shares of a broad range of company sizes
and has a weighted average market capitalization substantially lower than the
S&P 500 ($20 billion for the Fund versus $41 billion for the S&P). Although it
is difficult to forecast how long the outperformance of the very largest stocks
will continue, it is not likely to go on indefinitely. When the relative
performance of the other stocks improves, the Fund should benefit.
Finally, I am pleased to report that Lipper Analytical Services, Inc.
has informed us that your Fund ranks number one among the five Growth & Income
Funds in the Lipper Closed-End Fund Performance Comparison Service for the 10
year period ending December 31, 1996. This achievement provides further
confirmation of the benefits of the Liberty Asset Management Company's
multi-management investment program for All-Star.
Sincerely,
/s/ Richard R. Christensen
Richard R. Christensen
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
2
<PAGE>
SHAREHOLDERS' INVESTMENT GROWTH AS OF MARCH 31,1997
................................................................................
- --------------------------------- [MOUNTAIN CHART] ----------------------------
$44.19 --| To evaluate your
| investment in
| All-Star, these
| values should be
$35.81 --| used. Each shows how
your investment has
fared by keeping
Additional Investments distributions at
Made Through Rights work in the Fund.
Offerings The upper value
includes additional
investments made
through rights
offerings in 1992,
1993 and 1994.
Net Asset Value of Shares
Acquired Through Dividend
Reinvestment
$11.73 -- This is the net
asset value of one
share of All-Star as
of 3/31/97.
Mar-87 11.03 11.09 11.09
Apr-87 10.72 10.77 10.77
May-87 10.81 10.86 10.86
Jun-87 11.23 11.32 11.32
Jul-87 11.73 11.82 11.82
Aug-87 11.60 12.39 12.39
Sep-87 10.87 11.94 11.94
Oct-87 8.31 9.12 9.12
Nov-87 7.58 8.32 8.32
Dec-87 7.90 9.01 9.01
Jan-88 8.29 9.45 9.45
Feb-88 8.64 9.85 9.85
Mar-88 8.29 9.51 9.51
Apr-88 8.30 9.52 9.52
May-88 8.26 9.47 9.47
Jun-88 8.43 9.95 9.95
Jul-88 8.33 9.83 9.83
Aug-88 8.12 9.58 9.58
Sep-88 8.28 10.05 10.05
Oct-88 8.43 10.23 10.23
Nov-88 8.30 10.08 10.08
Dec-88 8.29 10.34 10.34
Jan-89 8.83 11.01 11.01
Feb-89 8.67 10.81 10.81
Mar-89 8.60 11.03 11.03
Apr-89 9.01 11.56 11.56
May-89 9.40 12.06 12.06
Jun-89 9.07 12.00 12.00
Jul-89 9.81 12.98 12.98
Aug-89 10.03 13.27 13.27
Sep-89 9.82 13.38 13.38
Oct-89 9.61 13.10 13.10
Nov-89 9.72 13.25 13.25
Dec-89 9.58 13.44 13.44
Jan-90 9.02 12.66 12.66
Feb-90 9.11 12.78 12.78
Mar-90 9.14 13.18 13.18
Apr-90 9.00 12.98 12.98
May-90 9.92 14.30 14.30
Jun-90 9.72 14.42 14.42
Jul-90 9.69 14.38 14.38
Aug-90 8.91 13.22 13.22
Sep-90 8.23 12.59 12.59
Oct-90 8.21 12.56 12.56
Nov-90 8.77 13.42 13.42
Dec-90 8.92 14.01 14.01
Jan-91 9.37 14.72 14.72
Feb-91 10.04 15.77 15.77
Mar-91 10.18 16.42 16.42
Apr-91 10.11 16.31 16.31
May-91 10.62 17.13 17.13
Jun-91 9.87 16.33 16.33
Jul-91 10.35 17.13 17.13
Aug-91 10.39 17.65 17.65
Sep-91 10.33 17.55 17.55
Oct-91 10.52 17.87 17.87
Nov-91 9.92 17.28 17.28
Dec-91 11.20 19.51 19.51
Jan-92 11.00 19.16 19.16
Feb-92 10.77 19.25 19.25
Mar-92 10.56 18.87 18.87
Apr-92 10.66 19.05 20.96
May-92 10.76 19.23 21.15
Jun-92 10.24 18.77 20.65
Jul-92 10.69 19.59 21.56
Aug-92 10.21 19.18 21.11
Sep-92 10.45 19.64 21.61
Oct-92 10.55 19.82 21.82
Nov-92 10.68 02.57 22.64
Dec-92 10.78 20.76 22.85
Jan-93 10.86 20.92 23.02
Feb-93 10.70 20.61 22.68
Mar-93 10.75 21.23 23.37
Apr-93 10.42 20.58 22.65
May-93 10.52 21.29 23.44
Jun-93 10.56 21.37 23.53
Jul-93 10.54 21.33 23.48
Aug-93 10.73 22.26 24.52
Sep-93 10.79 22.39 24.66
Oct-93 10.84 22.49 26.27
Nov-93 10.34 22.00 25.69
Dec-93 10.40 22.48 26.25
Jan-94 10.77 23.28 27.18
Feb-94 10.34 22.91 26.75
Mar-94 9.85 21.83 25.48
Apr-94 9.93 22.00 25.69
May-94 9.80 22.26 25.98
Jun-94 9.48 21.53 25.13
Jul-94 9.78 22.21 25.93
Aug-94 9.99 23.28 27.17
Sep-94 9.69 22.58 27.86
Oct-94 9.86 22.97 28.35
Nov-94 9.17 21.79 27.11
Dec-94 9.26 22.19 27.37
Jan-95 9.40 22.52 27.79
Feb-95 9.49 23.31 28.75
Mar-95 9.83 24.14 29.78
Apr-95 9.98 24.51 30.24
May-95 10.13 25.49 31.44
Jun-95 10.53 26.49 32.69
Jul-95 10.95 27.55 33.99
Aug-95 10.74 27.73 34.21
Sep-95 11.05 28.53 35.19
Oct-95 10.93 28.22 34.18
Nov-95 11.04 29.23 36.07
Dec-95 11.03 29.21 36.04
Jan-96 11.39 30.16 37.21
Feb-96 11.57 30.64 37.80
Mar-96 11.42 31.01 38.26
Apr-96 11.65 31.63 39.03
May-96 11.62 32.42 40.01
Jun-96 11.53 32.17 39.70
Jul-96 10.88 30.36 37.46
Aug-96 10.98 31.41 38.76
Sep-96 11.71 33.50 41.34
Oct-96 11.88 33.99 41.94
Nov-96 12.35 36.31 44.81
Dec-96 11.95 35.54 43.86
Jan-97 12.65 37.62 46.43
Feb-97 12.55 37.32 46.06
Mar-97 11.73 35.81 44.19
- --------------------------------------------------------------------------------
Net Asset Value of One Share
Since its inception, the Fund has maintained an optional Automatic
Dividend Reinvestment and Cash Purchase Plan, whereby distributions are
automatically invested in additional shares of the Fund. In addition, three
rights offerings have allowed investors to acquire additional shares at a
discount from the market price. The rights offering in April 1992 allowed
investors to acquire one share at $10.05 for every 10 shares held; the one in
October 1993 allowed investors to acquire one share at $10.41 for every 15
shares held; and the one in September 1994 allowed investors to acquire one
share at $9.14 for every 15 shares held.
As the graph above shows, an original share, assuming participation in
all of the rights offerings and reinvestment of all distributions, has grown to
a net asset value of $44.19 (3.767 shares times the current $11.73 net asset
value per share) and a market price value of $44.26 (3.767 shares times the
current $11.75 market price per share). Excluding the rights offerings shares,
an original share has grown to 3.053 shares. Thus, the original share has grown
to a net asset value of $35.81 (3.053 shares times the current $11.73 net asset
value per share) and a market price value of $35.87 (3.053 shares times the
current $11.75 market price per share).
3
<PAGE>
A TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENT
................................................................................
<TABLE>
<CAPTION>
Shares Shares
Shares Purchased Acquired Shares NAV(1) Total NAV Price Total
Owned At Through Through Owned Per Share Of Per Share Price Of
Beginning Per Share Reinvestment Rights At End At End Shares At End Shares
Year Of Period Distributions Program Offering Of Period Of Period Owned Of Period Owned
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140 $7.90 $9.01 $6.00 $6.84
- ----------------------------------------------------------------------------------------------------------------------------------
1988 1.140 0.64 .107 -- 1.247 8.29 10.34 7.25 9.04
- ----------------------------------------------------------------------------------------------------------------------------------
1989 1.247 0.95 .156 -- 1.403 9.58 13.44 8.25 11.57
- ----------------------------------------------------------------------------------------------------------------------------------
1990 1.403 0.90 .168 -- 1.571 8.92 14.01 7.75 12.18
- ----------------------------------------------------------------------------------------------------------------------------------
1991 1.571 1.02 .171 -- 1.742 11.20 19.51 10.75 18.73
- ----------------------------------------------------------------------------------------------------------------------------------
1992 1.742 1.07 .199 0.179(2) 2.120 10.78 22.85 11.125 23.59
- ----------------------------------------------------------------------------------------------------------------------------------
1993 2.120 1.25(5) .266 0.138(3) 2.524 10.40 26.25 11.125 28.08
- ----------------------------------------------------------------------------------------------------------------------------------
1994 2.524 1.00 .277 0.155(4) 2.956 9.26 27.37 8.50 25.13
- ----------------------------------------------------------------------------------------------------------------------------------
1995 2.956 1.04 .311 -- 3.267 11.03 36.04 10.875 35.53
- ----------------------------------------------------------------------------------------------------------------------------------
1996 3.267 1.31(6) .403 -- 3.670 11.95 43.86 11.25 41.29
- ----------------------------------------------------------------------------------------------------------------------------------
1997
1st Qtr. 3.670 0.32 .097 -- 3.767 11.73 44.19 11.75 44.26
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $11.125.
6. Includes the $0.13 per share tax credit passed through to shareholders, which
was assumed to be reinvested at the year-end price of $11.25.
4
<PAGE>
PORTFOLIO CHARACTERISTICS
................................................................................
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN PORTFOLIO
CHARACTERISTICS
The Portfolio Characteristics table on this page is a regular feature of the
Fund's shareholder reports. It serves as a useful tool for understanding the
value of a multi-managed portfolio. The characteristics are different for each
of the Fund's five Portfolio Managers. These differences are a reflection of the
fact that each pursues a different Investment Style. The shaded column
highlights the characteristics of the Fund as a whole, while the final column
shows portfolio characteristics for the entire S&P 500 Stock Index.
THE INVESTMENT STYLES PRACTICED BY THE FUND'S FIVE PORTFOLIO MANAGERS ARE:
PALLEY-NEEDELMAN ASSET MANAGEMENT, INC.
Companies with attractive valuations, sound fundamentals and above-average
dividend income.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Medium to large size companies from all market sectors that are undervalued
relative to their projected growth rates.
OPPENHEIMER CAPITAL
Contrarian holdings being overlooked and undervalued by investors.
COLUMBUS CIRCLE INVESTORS
Companies whose growing earnings are not fully reflected in their share prices.
WILKE/THOMPSON CAPITAL MANAGEMENT, INC.
High quality growth companies across the market capitalization spectrum with
sustainable secular earnings growth.
PORTFOLIO CHARACTERISTICS AS
OF MARCH 31, 1997
(UNAUDITED) INVESTMENT STYLE SPECTRUM
VALUE ============== GROWTH
<TABLE>
<CAPTION>
Palley- J.P. Oppen- Columbus Wilke/ Total S&P
Needelman Morgan heimer Circle Thompson Fund 500 Index
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO
Number of Holdings 38 80 28 54 46 220 500
Percent in Top 10 33% 27% 49% 30% 37% 12% 19%
- ----------------------------------------------------------------------------------------------------------------------------------
LEVERAGE
Average Debt/Capital Ratio 35% 36% 45% 30% 31% 34% 33%
- ----------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY
Average Return on Equity 14% 17% 17% 16% 19% 17% 20%
- ----------------------------------------------------------------------------------------------------------------------------------
GROWTH
Average Five-Year Earnings
Per Share Growth 13% 17% 25% 25% 40% 21% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
YIELD
Dividend Yield 2.0% 1.6% 1.3% 0.9% 0.3% 1.3% 2.0%
- ----------------------------------------------------------------------------------------------------------------------------------
VALUATION
Average Price/Earnings Ratio 16.2x 18.2x 16.6x 22.2x 27.8x 19.1x 18.4x
Average Price/Book Value Ratio 3.3x 4.2x 4.4x 6.0x 5.5x 4.6x 4.6x
</TABLE>
5
<PAGE>
TOP 50 HOLDINGS
<TABLE>
<CAPTION>
..................................................................................................
RANK RANK
AS OF AS OF VALUE PERCENT OF
3/31/97 12/31/96 SECURITY NAME ($000) NET ASSETS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 7 Warner-Lambert Co. $14,394 1.5%
2 6 May Department Stores Co. 12,968 1.3
3 9 Citicorp 12,663 1.3
4 3 Monsanto Co. 12,431 1.3
5 5 McDonnell Douglas Corp. 10,980 1.1
6 4 Federal Home Loan Mortgage Corp. 10,900 1.1
7 29 General Electric Co. 10,818 1.1
8 18 Providian Corp. 10,304 1.1
9 24 USX-Marathon Group 10,169 1.0
10 21 EXEL Limited 10,140 1.0
11 12 Boeing Co. 10,020 1.0
12 88 Staples, Inc. 9,970 1.0
13 19 Travelers Group, Inc. 9,575 1.0
14 2 Intel Corp. 9,572 1.0
15 8 International Business Machines Corp. 8,751 0.9
16 NEW Linear Technology Corp. 8,615 0.9
17 81 SBC Communications, Inc. 8,362 0.9
18 NEW Motorola, Inc. 8,102 0.8
19 10 Pfizer, Inc. 8,076 0.8
20 25 MCI Communications Corp. 8,026 0.8
21 39 Exxon Corp. 7,780 0.8
22 41 Sprint Corp. 7,735 0.8
23 67 NationsBank Corp. 7,714 0.8
24 26 Progressive Corp. 7,665 0.8
25 37 Arrow Electronics, Inc. 7,611 0.8
26 42 Transamerica Corp. 7,608 0.8
27 1 Microsoft Corp. 7,583 0.8
28 22 AFLAC, Inc 7,500 0.8
29 149 Elan Corp. ADR 7,443 0.8
30 13 Avon Products, Inc. 7,350 0.8
31 14 Columbia/HCA Healthcare Corp. 7,169 0.7
32 NEW Fiserv, Inc. 7,152 0.7
33 48 American Stores Co. 7,044 0.7
34 17 Worldcom, Inc. 7,038 0.7
35 45 ConAgra, Inc. 6,993 0.7
36 NEW PanEnergy Corp. 6,853 0.7
37 105 HEALTHSOUTH Corp. 6,816 0.7
38 50 American Greetings Corp., Class A 6,611 0.7
39 30 Triton Energy Corp. 6,588 0.7
40 66 Novartis ADR 6,493 0.7
41 54 Royal Dutch Petroleum Co. ADR 6,475 0.7
42 115 United Healthcare Corp. 6,434 0.7
43 63 Allstate Corp. 6,361 0.7
44 46 AMR Corp. 6,188 0.6
45 16 Kimberly-Clark Corp. 6,187 0.6
46 111 General Instruments Corp. 6,142 0.6
47 27 Medtronic, Inc. 6,082 0.6
48 NEW Automatic Data Processing, Inc. 5,988 0.6
49 58 Burlington Northern Santa Fe 5,957 0.6
50 33 Union Pacific Corp. 5,891 0.6
</TABLE>
6
<PAGE>
MAJOR STOCK CHANGES IN THE FIRST QUARTER
................................................................................
The following are the major ($2.5 million or more) stock changes -- both
additions and reductions -- that were made in the Fund's portfolio during the
first quarter of 1997, not including the changes made in connection with the
substitution of Wilke/Thompson Capital Management, Inc. for Provident Investment
Counsel, Inc. as Portfolio Manager effective March 1, 1997.
<TABLE>
<CAPTION>
SHARES
==============================================
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 3/31/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
America Online, Inc. 80,100 80,100
Beneficial Corp. 80,000 80,000
Circus Circus Enterprises, Inc. 118,800 118,800
First Union Corp. 35,400 35,400
General Electric Co. 24,000 109,000
General Mills, Inc. 60,200 60,200
Grand Metropolitan PLC ADR 100,000 100,000
Morton International, Inc. 113,900 113,900
Motorola, Inc. 134,200 134,200
Nordstrom, Inc. 147,500 147,500
PanEnergy Corp. 158,900 158,900
SBC Communications, Inc. 64,400 158,900
Union Pacific Resources Group 116,239 190,600
United Healthcare Corp. 58,500 135,100
Wendy's International, Inc. 134,700 134,700
Advanced Micro Devices, Inc. (73,400) 0
Aluminum Company of America (36,400) 27,500
Atlantic Richfield Co. (22,500) 0
Computer Associates International, Inc. (143,825) 0
Dean Witter Discover & Co. * (65,200) 0
First Data Corp. (171,200) 151,054
First USA, Inc. (120,400) 64,000
Firstar Corp. (44,100) 0
Fleet Financial Group, Inc. (125,300) 32,300
General Motors Corp. (54,500) 33,800
H&R Block, Inc. (165,000) 0
Intel Corp. (61,000) 68,800
International Business Machines Corp. (20,200) 63,700
Johnson & Johnson (71,300) 0
Kellogg Co. (42,200) 0
Kimberly-Clark Corp. (41,500) 62,256
McDonnell Douglas Corp. (40,000) 180,000
Microsoft Corp. (128,500) 82,700
Minnesota Mining & Manufacturing Co. (63,800) 0
Oracle Corp. (150,000) 0
Schlumberger Ltd. (84,700) 0
Tandy Corp. (89,000) 0
Whirlpool Corp. (109,300) 0
</TABLE>
*Adjusted for stock split.
7
<PAGE>
MANAGER INTERVIEW
................................................................................
[PHOTO OF
MARK A. THOMPSON]
MARK A. THOMPSON
Wilke/Thompson Capital Management, Inc.
At Wilke/Thompson, the Investment Team Has to Like Your Management Team -- Or
You're Not in the Lineup
Wilke/Thompson Capital Management, Inc. is the newest of All-Star's five
Portfolio Managers. Based in Minneapolis, Wilke/Thompson concentrates on high
quality growth stocks over a spectrum of market capitalizations and emphasizes
bottom-up stock picking and fundamental research. The firm utilizes a team
approach to stock selection and ongoing portfolio management. We recently had
the opportunity to interview Chief Investment Officer Mark A. Thompson. The Fund
Manager, Liberty Asset Management Company (LAMCO), serves as the moderator for
the interview.
The views expressed in this interview represent the manager's views at the time
of the discussion and are subject to change.
LAMCO: As this is your first interview for Liberty All-Star Equity Fund, perhaps
a good place to start would be with some background about Wilke/Thompson Capital
Management.
THOMPSON: Wilke/Thompson is fast approaching its tenth anniversary. The company
was founded in the summer of 1987 by a couple of us who had co-managed IDS
Financial Corp.'s New Dimensions fund. A couple of years later, our President
and CEO, Paul Hayne, came on board to manage the firm and head up the marketing
function.
LAMCO: You were founded at a rather inauspicious time -- July `87, right before
the market peaked.
THOMPSON: That's why we're not market timers! Despite that, we're excited about
our anniversary this summer. We've grown to the point where we have $1.5 billion
under management and we remain 100 percent employee owned.
LAMCO: Wilke/Thompson is also a 100 percent equity manager.
THOMPSON: That's correct, 100 percent equity management. Even more specifically,
we're a 100 percent growth style equity manager.
LAMCO: You bring up growth style equity investing. Perhaps this is a good time
to ask you to share your overall investment philosophy and style.
THOMPSON: Our philosophy is to invest in high quality growth companies that
demonstrate the ability to sustain strong secular earnings growth,
notwithstanding overall economic conditions. To elaborate on that, we employ a
long-term buy and hold investment style, and as a consequence we have very low
portfolio turnover. The whole premise of our investment philosophy is based on
our conviction that stock prices follow sales and earnings growth. While there
may be deviations over short periods of time, fundamentals always win out over
the long term and demonstrate a tight linkage between a company's stock price
and its sales and earnings growth rate.
LAMCO: How about capitalization? Would you say that you are a large cap, mid-cap
or small cap investor?
THOMPSON: I classify us as all-cap investors. The average market capitalization
of our Liberty All-Star Equity Fund portfolio is $15.1 billion, compared with
the S&P 500's average market cap of $41 billion. We own the Coca-Colas,
Microsofts and Motorolas of the world, but we also own some stocks that are
considered mid-cap and some that would be considered small cap.
LAMCO: What is your most important criteria in picking a stock?
THOMPSON: Actually, there are five of them. Without exception, these five
criteria must be in place. Number one, is high unit sales growth. Number two,
the company must operate in a proprietary market niche. Number three, we
8
<PAGE>
MANAGER INTERVIEW
................................................................................
demand that companies be internally financed, that is, they may borrow from time
to time, but they must have the ability to generate growth rates of 15 percent
from operations and are not dependent on coming back to the market for funds.
Number four is conservative accounting practices and number five, which I
consider the most important of all, is a sound management team.
LAMCO: Perhaps you could expand on the last one.
THOMPSON: Our investment process is based on very intensive fundamental
research. We're very much bottom-up investors. We take a hands-on approach -- we
get out and visit companies on site. As a matter of fact, it's a basic tenet
here that we meet every company on site within one year of purchase, if we have
not visited them before purchase. At the very least, before we buy a company we
had to have talked to management. We do that to gain insight into the management
and understand their vision and where they see themselves taking the company.
That's critical in our long-term buy and hold style. Especially in a more
volatile stock market environment, such as the one we have today, it's critical
for us to understand where the company is going so we don't get carried away in
the currents of emotion that sweep over the market.
LAMCO: Is there one factor above all others that shapes your opinion of
management?
THOMPSON: When we're evaluating a management team, we talk to the people who
interface with that company and, subsequently, that management team. We talk to
their competitors. We talk to their suppliers. We talk to their customers. We
talk with anybody who may have a perspective on the company. Then, over time
we're in constant contact with management. . . quarterly, at a minimum, to
maintain continuity.
LAMCO: What additional factors characterize Wilke/Thompson's investment process?
THOMPSON: We employ a team approach. Our investment team consists of three
portfolio managers and two analysts. The entire team is responsible for the
portfolios from the standpoint that we do not have one person solely responsible
for buying and selling a particular holding. Since we don't have a single
individual who "owns" a stock, we bring several perspectives and biases to the
table when we're discussing the stock.
- --------------------------------------------------------------------------------
"When we're evaluating a management team...we talk to their competitors. We talk
to their suppliers. We talk to their customers. We talk with anybody who may
have a perspective on the company."
- --------------------------------------------------------------------------------
LAMCO: Is there something about Wilke/Thompson that you believe is truly unique?
THOMPSON: I believe the factor that really distinguishes us is that we're
totally research-driven. We're a relatively small firm of 15 people. One-third
of the staff is researching stocks. We're certainly not driven by marketing. The
only person who has marketing or client relations responsibilities written into
his job description is Paul Hayne, our president. In fact, we have separated the
running of the firm's day-to-day operations from that of portfolio management.
Paul runs the business side of the firm, while I'm responsible for the research
and investment side. Many small firms, in my estimation, make the mistake of
having their portfolio managers run the business, which is not necessarily the
portfolio manager's forte. At Wilke/Thompson, we separate the portfolio
management team so they can focus on what they do best.
- --------------------------------------------------------------------------------
"Let's say I have a bias in favor of a stock but someone else points out
something I may not be aware of. A very healthy discussion ensues in which we
challenge each other's point of view."
- --------------------------------------------------------------------------------
LAMCO: What about your sell discipline?
THOMPSON: Quite simply stated, we sell when the fundamentals of a particular
company change. I realize that is relatively subjective. However, we make that
determination by talking to company management on a quarterly basis. Our team
approach also plays a major role because we get multiple perspectives on a
stock. Let's say I have a bias in favor of a stock but someone else points out
something I may not be aware of. A very healthy discussion ensues in which we
challenge each other's point of view. It prevents us from rationalizing and
holding onto a stock that one of us happens to champion.
9
<PAGE>
MANAGER INTERVIEW
................................................................................
LAMCO: Basically, then, the selling decision is driven by fundamentals. When
you, as a team, decide they've deteriorated, you sell?
THOMPSON: That's correct. In the current market, if a company misses a quarter's
earnings estimate by a penny the stock may decline 25 percent. We do not
necessarily sell because one of our companies misses a quarter. If there's a
fundamental reason that it missed its estimate and we feel that that fundamental
reason cannot be corrected, we will sell immediately.
LAMCO: Is there a typical Wilke/Thompson holding period for a stock?
THOMPSON: I would say our typical holding period is three to five years.
Initially, we will not take more than a 1-1/2 percent position in a particular
company. Then we live with that company for two or three reporting periods. If
the company does what it told us they would do when we initially purchased the
stock, we will add to our position up to a limit of 5 percent for any one stock
in any one portfolio.
LAMCO: Can you tell us about some stocks that you particularly like?
THOMPSON: The first one that I'd like to discuss is one that exemplifies our
management style very well. It's Starbucks. If you look at our investment
criteria, this company definitely operates within a niche market segment, it has
tremendous unit growth and it has a sound management team. Starbucks is
executing a controlled growth type of strategy. Starbucks is also very flexible
because selling coffee in Seattle is different from selling coffee in
Minneapolis, where there's a skyway system as opposed to Starbucks' traditional
corner coffee house. Starbucks also has smaller store prototypes to allow it to
penetrate a market and put pressure on its competition.
Another stock I would like to highlight is Cintas. This is a uniform
services company headquartered in Cincinnati providing uniform rental, laundry
and related services. A lot of companies are moving toward outsourcing this
service to a company such as Cintas, but Cintas is a cut above its competitors.
It has a sound management team, superb execution and an excellent record of
long-term customer retention. Cintas also had the foresight to develop a
national accounts program in which a large company that has operations in
several states contracts with Cintas for all its needs as opposed to using local
providers in different areas.
HEALTHSOUTH Corp. is another example of the type of company in which
Wilke/Thompson invests. HEALTHSOUTH is the nation's largest provider of
outpatient and rehabilitative healthcare services. Led by its strong management
team, the company's market niche is providing patients, physicians and payers
with high quality healthcare services at significantly lower costs than
traditional hospitals.
LAMCO: I don't think we could wrap up a discussion these days without asking
what Wilke/Thompson thinks about the stock market. It was a pretty volatile
first quarter.
- --------------------------------------------------------------------------------
"I believe the factor that really distinguishes us is that we're totally
research-driven. One-third of the staff is researching stocks."
- --------------------------------------------------------------------------------
THOMPSON: We're likely to see continued higher volatility. What we have in the
marketplace today began with people buying companies based solely on what their
earnings were doing, i.e., "They're having great earnings, therefore we're going
to buy the stock." That really ignores the underlying fundamentals of a company.
Next, the thinking evolved to "We're going to invest in those companies that
have the ability to beat earnings estimates." So, that added a little more
volatility. After that, only companies whose earnings estimates were likely to
be raised were in favor. As this process evolved, we got a narrower and narrower
stock market, exacerbated by the fact that as the large mutual funds took in
more and more cash from investors the only place they could deploy it without
making a tremendous impact on the market was in some of the very large, very
liquid stocks. Thus, going forward, we have a polarized market led by overpriced
large cap stocks.
LAMCO: But your approach is to remain fully invested, so you're going to be in
the market regardless of volatility.
THOMPSON: That's correct. Market timing, in our opinion, is not an effective
approach to managing a portfolio. As I said earlier, we're not market timers.
What we're doing in this market is no different than what we've done in the
past, and that is to focus on high quality growth companies and employ a
long-term buy and hold investment process. We look at our companies the way the
business person would look at buying a business.
10
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (UNAUDITED)
................................................................................
COMMON STOCKS (96.0%) SHARES MARKET VALUE
AEROSPACE (2.5%)
Boeing Co. 101,600 $10,020,300
Lockheed Martin Corp. 41,800 3,511,200
McDonnell Douglas Corp. 180,000 10,980,000
-----------
24,511,500
-----------
AUTO, TIRES & ACCESSORIES (0.4%)
AutoZone, Inc. (a) 104,100 2,342,250
General Motors Corp. 33,800 1,871,675
-----------
4,213,925
-----------
BANKS (4.3%)
Chase Manhattan Corp. 54,600 5,111,925
Citicorp 116,700 12,632,775
Dime Bancorp, Inc. (a) 91,700 1,409,887
First Chicago NBD Corp. 61,100 3,307,038
First Hawaiian, Inc. 64,100 1,995,113
First Union Corp. 35,400 2,871,825
Fleet Financial Group, Inc. 32,300 1,849,175
NationsBank Corp. 139,300 7,713,738
Washington Mutual, Inc. 14,900 719,856
Wells Fargo & Co. 15,000 4,261,875
-----------
41,873,207
-----------
BUSINESS SERVICES (3.7%)
America Online, Inc. (a) 80,100 3,394,238
Autodesk, Inc. 67,400 2,089,400
Automatic Data Processing, Inc. 143,000 5,988,125
First Data Corp. 151,054 5,116,954
First USA Paymentech, Inc. (a) 1,800 47,025
Fiserv, Inc. (a) 192,000 7,152,000
Intuit, Inc. (a) 71,000 1,633,000
Macromedia, Inc. (a) 100,000 906,250
Paychex, Inc. 87,400 3,594,325
Precision Response (a) 119,000 2,811,375
Sitel Corp. (a) 217,600 2,910,400
-----------
35,643,092
-----------
CHEMICALS (2.7%)
E.I. du Pont de Nemours & Co. 33,200 3,519,200
IMC Global, Inc. 77,700 2,806,913
Monsanto Co. 325,000 12,431,250
Morton International, Inc. 113,900 4,812,275
Union Carbide Corp. 75,000 3,318,750
-----------
26,888,388
-----------
COMPUTER & BUSINESS EQUIPMENT (5.6%)
Broderbund Software, Inc. (a) 65,000 1,421,875
Cisco Systems, Inc. (a) 112,800 5,428,500
Electronic Arts, Inc. (a) 114,700 3,053,887
HBO & Co. 93,600 4,446,000
Ingram Micro, Inc. Class A (a) 173,400 3,619,725
Intel Corp. 68,800 9,571,800
SHARES MARKET VALUE
COMPUTER & BUSINESS EQUIPMENT (CONT.)
International Business Machines Corp. 63,700 $ 8,750,787
Microsoft Corp. (a) 82,700 7,582,556
NCR Corp. (a) 3,162 111,461
Sun Microsystems, Inc. (a) 46,300 1,336,913
Tech Data Corp. (a) 148,000 3,570,500
The Learning Company, Inc. (a) 7,900 52,337
Xerox Corp. 90,700 5,158,563
-----------
54,104,904
-----------
CONSTRUCTION (1.2%)
Foster Wheeler Corp. 153,800 5,440,675
Masco Corp. 164,000 5,863,000
USG Corp. (a) 25,700 806,337
-----------
12,110,012
-----------
CONSUMER PRODUCTS (1.7%)
Newell Holding Co. 50,600 1,695,100
Oakley, Inc. (a) 214,500 1,930,500
Procter & Gamble Co. 48,200 5,543,000
Ralston-Ralston Purina Group 47,700 3,726,563
Unilever NV ADR 16,700 3,110,375
-----------
16,005,538
-----------
COSMETICS & TOILETRIES (1.1%)
Avon Products, Inc. 140,000 7,350,000
Gillette Co. 50,400 3,660,300
-----------
11,010,300
-----------
DIVERSIFIED (2.8%)
Allied Signal, Inc. 56,000 3,990,000
Coltec Industries (a) 56,400 1,043,400
Cooper Industries, Inc. 82,400 3,574,100
General Electric Co. 109,000 10,818,250
Johnson Controls, Inc. 24,500 1,978,375
Parker Hannifin Corp. 134,300 5,741,325
-----------
27,145,450
-----------
DRUGS & HEALTH CARE (10.3%)
Alza Corp. (a) 65,800 1,809,500
Bausch & Lomb, Inc. 37,900 1,497,050
Boston Scientific Corp. (a) 25,100 1,549,925
Bristol-Myers Squibb Co. 26,700 1,575,300
Cardinal Health, Inc. 53,650 2,917,219
Columbia/HCA Healthcare Corp. 213,200 7,168,850
Elan Corp. ADR (a) 218,100 7,442,662
Eli Lilly & Co. 49,000 4,030,250
Forest Laboratories, Inc. (a) 67,800 2,550,975
HEALTHSOUTH Corp. (a) 356,400 6,816,150
Humana, Inc. (a) 137,100 3,016,200
IDEXX Labs, Inc. (a) 177,400 2,483,600
Medtronic, Inc. 97,700 6,081,825
Novartis ADR 105,799 6,493,414
See Notes to Schedule of Investments. 11
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (UNAUDITED)
................................................................................
COMMON STOCKS (CONT.) SHARES MARKET VALUE
DRUGS & HEALTH CARE (CONT.)
Pfizer, Inc. 96,000 $ 8,076,000
Pharmacia & Upjohn, Inc. 160,200 5,867,325
R.P. Scherer Corp. (a) 58,700 3,045,062
Schering-Plough Corp. (a) 27,800 2,022,450
Steris Corp. (a) 85,500 2,084,062
Teva Pharmaceuticals ADR 36,200 2,009,100
United Healthcare Corp. 135,100 6,434,138
Warner-Lambert Co. 166,400 14,393,600
-----------
99,364,657
-----------
ELECTRICAL UTILITIES (0.6%)
Duke Power Co. 42,700 1,884,137
Edison International 118,800 2,673,000
Pinnacle West Capital Corp. 30,000 903,750
-----------
5,460,887
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT (7.5%)
Adaptec, Inc. (a) 47,200 1,687,400
Anixter International, Inc. (a) 62,800 777,150
Arrow Electronics, Inc. (a) 135,000 7,610,625
Cypress Semiconductor Corp. (a) 51,400 642,500
EMC Corp. (a) 87,700 3,113,350
General Instruments Corp. (a) 268,500 6,141,937
General Motors, Class H 34,000 1,844,500
Honeywell, Inc. 58,400 3,963,900
International Game Technology 117,100 1,888,237
Input/Output, Inc. (a) 59,700 865,650
Linear Technology Corp. 194,700 8,615,475
LSI Logic Corp. (a) 86,200 2,995,450
Molex, Inc. (a) 138,000 4,899,000
Motorola, Inc. 134,200 8,102,325
Perkin-Elmer Corp. 37,300 2,401,187
Raytheon Co. 130,200 5,875,275
Sensormatic Electronics Corp. 120,200 2,028,375
Texas Instruments, Inc. 26,900 2,014,137
W.W. Grainger, Inc. 18,900 1,398,600
Xilinix, Inc. (a) 41,400 2,018,250
Zilog, Inc. (a) 152,500 3,202,500
-----------
72,085,823
-----------
FINANCIAL SERVICES (5.3%)
Advanta Corp., Class B 50,100 1,296,337
Associates First Capital Corp. 65,900 2,833,700
Beneficial Corp. 80,000 5,170,000
Countrywide Credit Industries, Inc. 150,000 3,712,500
CUC International, Inc. (a) 139,800 3,145,500
Federal Home Loan Mortgage Corp. 400,000 10,900,000
First USA, Inc. 64,000 2,712,000
Green Tree Financial Corp. 106,000 3,577,500
Merrill Lynch & Co., Inc. 30,700 2,636,363
SHARES MARKET VALUE
FINANCIAL SERVICES (CONT.)
Morgan Stanley Group, Inc. 100,000 $ 5,875,000
Travelers Group, Inc. 200,000 9,575,000
-----------
51,433,900
-----------
FOOD, BEVERAGE & RESTAURANTS (4.3%)
Coca-Cola Co. 51,200 2,860,800
ConAgra, Inc. 128,900 6,992,825
Dole Food Co. 140,000 5,285,000
Dreyers Grand Ice Cream 61,000 2,013,000
General Mills, Inc. 60,200 3,739,925
Grand Metropolitan PLC ADR 100,000 3,187,500
H.J. Heinz Co. 49,600 1,959,200
McDonalds Corp. 105,600 4,989,600
Pepsico, Inc. 88,400 2,884,050
Starbucks Corp. (a) 150,300 4,452,637
Wendy's International, Inc. 134,700 2,778,187
-----------
41,142,724
-----------
HOTELS & LEISURE (1.3%)
Brunswick Corp. 185,000 4,971,875
Circus Circus Enterprises, Inc.(a) 118,800 3,088,800
HFS, Inc. (a) 30,800 1,813,350
Hilton Hotels Corp. 117,800 2,856,650
-----------
12,730,675
-----------
INDUSTRIAL EQUIPMENT (1.2%)
Catepillar, Inc. 30,000 2,407,500
Crown Cork & Seal Co., Inc. 92,000 4,749,500
New Holland NV 194,700 4,332,075
-----------
11,489,075
-----------
INSURANCE (5.9%)
AFLAC, Inc. 200,000 7,500,000
Allstate Corp. 106,900 6,360,550
Aon Corp. 94,450 5,785,062
Conseco, Inc. 40,800 1,453,500
EXEL Limited 240,000 10,140,000
Progressive Corp. 120,000 7,665,000
Providian Corp. 192,600 10,304,100
Transamerica Corp. 85,000 7,607,500
-----------
56,815,712
-----------
METALS & MINING (1.4%)
Allegheny Teledyne, Inc. 205,100 5,768,437
Aluminum Company of America 27,500 1,870,000
Freeport-McMoRan Copper & Gold, Inc., Class A 185,000 5,619,375
-----------
13,257,812
-----------
OIL & GAS (7.2%)
Anadarko Petroleum Co. 36,200 2,031,725
Enron Corp. 43,500 1,653,000
12 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (UNAUDITED)
................................................................................
COMMON STOCKS (CONT.) SHARES MARKET VALUE
OIL & GAS (CONT.)
Exxon Corp. 72,200 $ 7,779,550
Kerr-McGee Corp. 85,200 5,271,750
Mobil Corp. 33,100 4,323,687
PG & E Corp. 83,800 1,969,300
Panenergy Corp. 158,900 6,852,563
Repsol SA ADR 124,500 5,073,375
Royal Dutch Petroleum Co. ADR 37,000 6,475,000
Sonat, Inc. 46,600 2,539,700
Tosco Corp. 93,400 2,661,900
Triton Energy Corp. (a) 170,000 6,587,500
Ultramar Diamond Shamrock Corp. 59,398 1,885,887
Union Pacific Resources Group 190,600 5,098,550
USX-Marathon Group 364,800 10,168,800
-----------
70,372,287
-----------
PAPER (1.2%)
Champion International Corp. 120,000 5,460,000
Kimberly-Clark Corp. 62,256 6,186,690
Temple Inland, Inc. 6,300 330,750
-----------
11,977,440
-----------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (0.5%)
Eastman Kodak Co. 66,800 5,068,450
-----------
POLLUTION CONTROL (0.7%)
Browning Ferris Industries, Inc. 62,500 1,804,687
WMX Technologies, Inc. 175,900 5,386,937
-----------
7,191,624
-----------
PUBLISHING (2.1%)
American Greetings Corp., Class A 207,000 6,611,063
Gannett Co., Inc. 55,600 4,774,650
R.R. Donnelley & Sons Co. 120,000 4,185,000
Time Warner, Inc. 116,200 5,025,650
-----------
20,596,363
-----------
RETAIL TRADE (10.0%)
American Stores Co. 158,300 7,044,350
Best Buy, Inc. (a) 200,000 2,050,000
CDW Computer Centers, Inc. (a) 78,500 3,537,406
Circuit City Stores, Inc. 88,600 2,957,025
Circuit City Stores-CARMAX (a) 51,000 765,000
Corporate Express, Inc. (a) 250,300 2,565,575
Costco Companies, Inc. (a) 125,000 3,455,887
Fastenal Co. (a) 157,400 5,509,000
Home Depot, Inc. 102,900 5,505,150
May Department Stores Co. 285,000 12,967,500
MSC Industrial Direct Co. (a) 81,200 2,364,950
Nordstrom, Inc. 147,500 5,586,563
Petsmart, Inc. (a) 112,300 2,274,075
SHARES MARKET VALUE
RETAIL TRADE (CONT.)
Quality Food Centers (a) 115,500 $ 4,851,000
Safeway, Inc. (a) 96,100 4,456,637
Staples, Inc. (a) 495,400 9,969,925
Sunglasses Hut International (a) 338,200 2,367,400
Talbots, Inc. (a) 149,500 4,727,937
TJX Companies, Inc. 74,500 3,184,875
Toys R Us, Inc. (a) 127,400 3,567,200
Wal-Mart Stores, Inc. 115,000 3,205,625
Walgreen Co. 117,500 4,920,313
-----------
97,833,393
-----------
SERVICES (1.8%)
Catalina Marketing Corp. (a) 47,400 1,925,625
Cintas Corp. 78,000 4,114,500
Gartner Group, Inc., Class A (a) 173,000 3,741,125
Henry Shein, Inc. (a) 78,400 2,273,600
Service Corp. International 167,200 4,974,200
-----------
17,029,050
-----------
TELECOMMUNICATIONS (6.3%)
Ascend Communications, Inc. (a) 62,700 2,555,025
Bay Networks, Inc. (a) 102,500 1,832,188
Bell Atlantic Corp. 29,700 1,807,987
British Telecommunications PLC ADR 15,000 1,050,000
Lucent Technologies, Inc. 58,200 3,070,050
MCI Communications Corp. 225,300 8,026,313
Nokia Corp. ADR 100,000 5,825,000
QUALCOMM, Inc. (a) 47,300 2,666,538
SBC Communications, Inc. 158,900 8,362,113
Sprint Corp. 170,000 7,735,000
TCI Satellite Entertainment, Inc. (a) 84,900 657,975
Tele Communications, Inc. (a) 389,600 4,675,200
Tele Danmark ADR 60,000 1,567,500
U.S. Robotics Corp. (a) 32,000 1,772,000
US West Communications Group 68,200 2,318,800
Worldcom, Inc. (a) 319,900 7,037,800
-----------
60,959,489
-----------
TRANSPORTATION (2.4%)
AMR Corp. (a) 75,000 6,187,500
Burlington Northern Santa Fe 80,500 5,957,000
Consolidated Freightways Corp.(a) 37,000 439,375
Consolidated Freightways, Inc. 73,900 2,004,540
CSX Corp. 44,300 2,059,950
Union Pacific Corp. 103,800 5,890,650
-----------
22,539,015
-----------
TOTAL COMMON STOCKS
(Cost $750,704,629) 930,854,692
-----------
See Notes to Schedule of Investments. 13
<PAGE>
SCHEDULE OF INVESTMENTS / PER SHARE CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
CONVERTIBLE BONDS & NOTES (0.3%) PAR MARKET
DIVERSIFIED (0.3%) VALUE VALUE
<S> <C> <C> <C> <C>
Berkshire Hathaway Sr. Note 1.00% 12/03/01
(Cost $2,819,241) $2,700,000 $2,643,057
----------
SHORT-TERM INVESTMENTS (3.9%) INTEREST MATURITY
RATE DATE
COMMERCIAL PAPER (1.8%)
Canadian Wheat Board 5.28% 04/07/97 3,000,000 2,997,360
Dean Witter Discover 5.50 04/09/97 2,000,000 1,997,555
Ford Motor Credit Corp. 5.50 04/01/97 2,700,000 2,700,000
GE Capital Corp. 5.30 04/18/97 2,200,000 2,194,494
Goldman Sachs 5.32 04/11/97 3,000,000 2,995,567
Household Finance Corp. 5.60 04/03/97 2,200,000 2,199,316
Lucent Technologies 5.24 04/03/97 2,800,000 2,799,185
----------
TOTAL COMMERCIAL PAPER (COST $17,883,477) 17,883,477
----------
DISCOUNT NOTE (2.1%)
Federal Home Loan Mortgage 6.50% 04/01/97 (Cost $20,022,644) 20,025,000 20,025,000
----------
TOTAL SHORT-TERM INVESTMENTS (COST $37,906,121) 37,908,477
----------
TOTAL INVESTMENTS (100.2%) (COST $791,429,991) (b) 971,406,226
OTHER ASSETS AND LIABILITIES, NET (-0.2%) (1,612,424)
----------
NET ASSETS (100.0%) $969,793,802
============
NET ASSET VALUE PER SHARE (82,706,226 SHARES OUTSTANDING) $ 11.73
============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Gross unrealized appreciation and depreciation of investments at
March 31, 1997 is as follows:
Gross unrealized appreciation $214,363,250
Gross unrealized depreciation (34,387,015)
------------
Net unrealized appreciation $179,976,235
============
Acronym Name
------- ---------------------------
ADR American Depository Receipt
<TABLE>
<CAPTION>
PER SHARE CHANGES THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
IN NET ASSETS MARCH 31, 1997 -------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78 $ 11.20
--------- --------- --------- --------- --------- ---------
Net investment income 0.01 0.08 0.10 0.11 0.12 0.16
Distributions declared (0.32) (1.18) (1.04) (1.00) (1.07) (1.07)
Changes due to rights offerings (a) -- -- -- (0.05) (0.03) (0.05)
Net realized and unrealized
gain (loss) on investments 0.09 2.15 2.71 (0.20) 0.78 0.54
Provision for Federal income tax -- (0.13) -- -- (0.18) --
--------- --------- --------- --------- --------- ---------
Net asset value at end of period $ 11.73 $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
========= ========= ========= ========= ========= =========
(a) Effect of All-Star's rights offerings for shares at a price below net asset value.
</TABLE>
14
<PAGE>
DISTRIBUTION POLICY / DIVIDEND REINVESTMENT PLAN / 1997 ANNUAL MEETING
................................................................................
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its common shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. The fixed distributions are not
related to the amount of the Fund's net investment income or net realized
capital gains or losses. If, for any calendar year, the total distributions
required by the 10 percent pay-out policy exceed the Fund's net investment
income and net realized capital gains, the excess will generally be treated as a
tax-free return of capital, reducing the shareholder's adjusted basis in his or
her shares. If the Fund's net investment income and net realized capital gains
for any year exceed the minimum amount required to be distributed under the 10
percent pay-out policy, the Fund may, at its discretion, retain and not
distribute net long-term capital gains to the extent of such excess. The Fund
retained such excess gains in 1993 and 1996.
DIVIDEND REINVESTMENT PLAN
Through the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan, the
Fund's 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 the Fund owned by shareholders who
have participated in the Dividend Reinvestment Program since the Fund began
operations in 1986 would have grown to 3.053 shares as of March 31, 1997. These
shares have a total net asset value of $35.81. 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.
1997 ANNUAL MEETING
At the Fund's 1997 Annual Meeting held on April 16, shareholders re-elected
Robert J. Birnbaum as Trustee for a term of three years, ratified the selection
of KPMG Peat Marwick LLP as the Fund's independent auditors for the current
year, and ratified the Fund's portfolio management agreements with J.P. Morgan
Investment Management Inc. and Wilke/Thompson Capital Management, Inc.
15
<PAGE>
[LIBERTY
ALL*STAR
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EQUITY FUND
LOGO]
New York Stock Exchange Trading Symbol: USA
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lamco.com
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 & DIVIDEND
DISBURSING AGENT & REGISTRAR
State Street Bank and Trust Company
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
LEGAL COUNSEL
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
TRUSTEES
Robert J. Birnbaum*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
OFFICERS
Harold W. Cogger, Chairman of the Board of Trustees
Richard R. Christensen, President & Chief Executive Officer
William R. Parmentier, Jr., Vice President & Chief Investment Officer
Christopher S. Carabell, Vice President
Timothy J. Jacoby, Treasurer
Peter L. Lydecker, Controller
John L. Davenport, Secretary
* Member of the audit committee.
- --------------------------------------------------------------------------------
Liberty Asset Management Company, the Fund's manager,
is one of the Liberty Financial Companies (NYSE: L).
[LIBERTY
FINANCIAL
LOGO]
FIRST
QUARTER
REPORT
1997
[LIBERTY
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EQUITY FUND
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