- ------------------------------
LIBERTY ALL * STAR EQUITY FUND
NEW YORK STOCK EXCHANGE TRADING SYMBOL: USA
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.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 AND DIVIDEND
DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
LEGAL COUNSEL
Bingham, Dana & Gould
150 Federal Street
Boston, Massachusetts 02110
TRUSTEES
Robert J. Birnbaum*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
OFFICERS
Harold W. Cogger, Chairman of the Board of Trustees
Richard R. Christensen, President & Chief Executive Officer
William R. Parmentier, Jr., Vice President & Chief Investment Officer
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 LOGO] LIBERTY FINANCIAL
[Recycle Logo] Printed on Recycled Paper with Soybean Inks D/69m/10-96
[LIBERTY LOGO]
LIBERTY ALL * STAR
EQUITY FUND
- ------------------------
3rd
Quarter Report
1996
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
- --------------------
Third Quarter Report
Chairman's Letter
To Our Fellow Shareholders: November 1996
The net asset value (NAV) of a common share of the Fund rose from $11.53 on June
30, 1996 to $11.71 on September 30, 1996 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 $9.50 to $11.125 before closing the quarter
at $11.00. The ending price represented a discount to NAV of 6.1 percent
compared with a discount to NAV of 6.8 percent on June 30, 1996. Key investment
results and comparisons are noted in the box.
Fund Performance for the third quarter and nine months ended September 30,
1996. Figures shown for the Fund and the Lipper Growth & Income Mutual Fund
Average are total returns, which include income, less fees and other operating
expenses. Figures shown for the unmanaged S&P 500 and Dow Jones indices are
total returns including income, and for the unmanaged Nasdaq Index are total
returns excluding income.
Latest
Third Nine
Quarter Months
------- ------
Liberty All-Star Equity Fund:
Shares Valued at Net Asset Value 4.2% 14.8%
Shares Valued at Market Price
(Dividends Reinvested) 4.9% 9.3%
Lipper Growth & Income Mutual Fund
Average 2.9% 12.4%
S&P 500 Stock Index 3.1% 13.5%
Dow Jones Industrial Average 4.6% 16.8%
Nasdaq Composite Index 3.5% 16.6%
Fund's Closing Price Range $11.125 to $11.50 to
$9.75 $9.75
Fund's (Discount)/Premium Range -9.2% to -9.2% to
-2.1% 1.6%
The stock market continued its advance for the seventh quarter in a row. As the
box at the left shows, the Fund's net asset value was up 4.2 percent, which
compares favorably with 2.9 percent for the Lipper Growth & Income Mutual Fund
Average (the Fund's primary benchmark comparison) and 3.1 percent for the S&P
500 Stock Index. For the nine months of 1996, the Fund's net asset value was up
14.8 percent compared with 12.4 percent for the Lipper Average and 13.5 percent
for the S&P 500.
The broad market correction which began about the end of May bottomed out in
July. Then the market rebounded to levels above the previous highs by the end of
the third quarter and also set new highs in October. Richard Christensen's
President's Letter, which follows, provides additional perspective.
We mentioned in the semi-annual report that the Fund's net investment income and
realized capital gains for the 1996 tax year would likely exceed the amount
required to be distributed under the Fund's 10 percent pay-out policy. We
estimate that such excess gains will be approximately 38 cents per share. The
Board of Trustees at its October meeting directed that the Fund retain, and not
distribute, its net realized long term gains in the amount of this excess.
Please refer to the enclosed IMPORTANT TAX NOTICE which describes the
information you will receive in January for inclusion in your 1996 income tax
filing.
Sincerely,
[/s/ Harold W. Cogger]
Harold W. Cogger
Chairman of the Board of Trustees
Liberty All-Star Equity Fund
1
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
- --------------------
Third Quarter Report
President's Letter
To Our Fellow Shareholders: November 1996
This summer's market correction was noteworthy mainly in the quickness of the
rebound to new highs. The S&P 500 Stock Index peaked at 679 on May 24, dropped
to 627 on July 24, then rose to a new high of 687 on September 30. So, the depth
of the correction was nearly eight percent over a period of two months, and
within only about another two months the market was back to new highs and it set
several additional highs in the first half of October. The Nasdaq Composite
Index showed a comparable pattern except that its depth of correction at 17
percent was about twice that of the S&P 500.
In the semi-annual report, we pointed out that the S&P 500 had not had a
correction of as much as 10 percent in the nearly six year period since 1990,
the longest such period without such a correction in the 40 year history of the
S&P 500 Stock Index. That record is still intact.
The bull market appears also to remain intact, but at these levels it is
vulnerable to negative surprises in corporate earnings, inflation, interest
rates and political developments.
The table below shows all the corrections of more than seven percent in the S&P
500 since the Fund commenced operations in late 1986. In the four years 1987
through 1990, we had three such corrections, including the Crash of '87 and the
severe correction of '90. In the six years since 1990, we have had only two such
corrections, both mild compared with those of 1987 and 1990. The 1996 correction
had the shortest recovery time of all five corrections.
<TABLE>
<CAPTION>
Year Depth of Correction Time Recovery Time Total Time
Correction Correction (from (from peak to (from trough to (from previous
Began peak to trough) trough) new peak) peak to new peak)
---------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
1987 35% 3 months 20 months 23 months
1989 10 4 4 8
1990 20 3 4 7
1994 9 2 10 12
1996 8 2 2 4
</TABLE>
Please note the announcement on page 4 of the fourth quarter distribution of
31 cents per share which has been declared by the Board of Trustees.
J.P. Morgan Investment Management Inc., which replaced Cooke & Bieler, Inc.
as one of the Fund's five Portfolio Managers July 1, 1996, is the subject of
the manager interview beginning on page 7. Henry Cavanna, Managing Director,
discusses the firm's investment philosophy and decision making process as
well as some companies whose stocks the firm has recently bought or sold for
its clients.
Sincerely,
[/s/ Richard R. Christensen]
Richard R. Christensen
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
2
<PAGE>
- ----------
Commentary
Managers' Differing Investment Styles
Are Reflected in Portfolio Characteristics
The Portfolio Characteristics table on this page is a regular feature of 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 an individual 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 good prospects.
J.P. Morgan Investment Management Inc.
Medium to large size companies 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.
Provident Investment Counsel, Inc.
Companies with fast growing earnings and bright prospects.
- -------------------------------------------------------------------------------
Portfolio Characteristics
as of
September 30, 1996
<TABLE>
<CAPTION>
Palley- J.P.
Needelman Morgan Oppenheimer
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Portfolio 1. Number of Holdings 38 85 27
2. Percent in Top Ten 35% 25% 49%
- ----------------------------------------------------------------------------------------------
Size and Debt Average Sales or Revenues
3. (billions) $14.9 $20.3 $12.8
4. Average Debt/Capital Ratio 33% 38% 44%
- ----------------------------------------------------------------------------------------------
Profitability 5. Average Return on Total Capital 9% 10% 13%
6. Average Return on Equity 14% 18% 22%
- ----------------------------------------------------------------------------------------------
Growth 7. Average Five-Year Sales
Per Share Growth 5% 9% 14%
8. Average Five-Year Earnings
Per Share Growth 20% 26% 27%
- ----------------------------------------------------------------------------------------------
Yield 9. Dividend Yield 2.6% 2.0% 1.5%
Average Five-Year
10. Dividend Payout Ratio 50% 37% 28%
- ----------------------------------------------------------------------------------------------
Valuation 11. Average Price/Earnings Ratio 20.3x 18.5x 13.9x
12. Average Price/Book Value Ratio 2.6x 2.8x 2.6x
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Columbus Total S&P
Circle Provident Fund 500 Index
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio 54 49 213 500
31% 40% 14% 18%
- -------------------------------------------------------------
Size and Debt $12.4 $6.9 $13.4 $23.3
28% 31% 35% 33%
- -------------------------------------------------------------
Profitability 12% 15% 12% 14%
17% 21% 18% 20%
- -------------------------------------------------------------
Growth 17% 19% 13% 10%
27% 28% 26% 21%
- -------------------------------------------------------------
Yield 1.0% 0.6% 1.5% 2.2%
25% 16% 31% 43%
- -------------------------------------------------------------
Valuation 22.1x 30.5x 19.7X 18.6x
3.3x 6.0x 3.1X 3.1x
- -------------------------------------------------------------
</TABLE>
3
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
- ---------------------------
Fourth Quarter Distribution
Declared
On November 11, the Board of Trustees declared the fourth quarter distribution,
which consists entirely of net realized capital gains, of 31 cents per share.
The distribution has been declared payable in newly issued shares to all
shareholders except those non-participants in the Dividend Reinvestment Plan
who specifically elect ("opt-out") to take the distribution in cash by signing
and returning an option card. The shares will be valued at the lower of market
value or net asset value (but not at a discount of more than five percent from
market value).
The distribution will be payable on January 6, 1997 to shareholders of record on
November 21, 1996. Shortly after the record date, a mailing will go out to all
record shareholders not participating in the Dividend Reinvestment Plan. The
mailing will include an option card, which must be signed and returned by
December 18, 1996 if the shareholder wishes to receive the distribution in cash.
No action is required to receive the distribution in shares. Shareholders whose
shares are held in the name of a brokerage firm, bank or other nominee should
contact their brokerage firm, bank or nominee as to whether they want the
distribution in shares or cash.
This form of distribution has proven to be popular with a clear majority of
individual shareholders. More than 61 percent of such shareholders took newly
issued shares in the third quarter distribution. By taking newly issued shares,
shareholders are able to reinvest their capital gains in the Fund so that these
gains can build additional value through compounding. Reinvested dividends are a
major source of shareholder investment growth as the chart on page 5 clearly
demonstrates.
- --------------------------
Major Stock Changes in the
Third 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 third quarter
of 1996.*
<TABLE>
<CAPTION>
Shares
----------------------------------
Held
Security Name Additions Reductions 9/30/96
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Atlantic Richfield Co. 29,700 29,700
First Chicago NBD Corp. 58,200 58,200
MCI Communications Corp. 151,500 400,900
Safeway, Inc. 75,000 171,100
Staples, Inc. 131,900 231,900
Texaco, Inc. 62,600 62,600
Wal-Mart Stores, Inc. 224,500 224,500
Automatic Data Processing, Inc. (100,000) 0
Browning Ferris Industries, Inc. (183,100) 0
Corestates Financial Corp. (60,000) 70,000
Delta Air Lines, Inc. (49,900) 0
Federated Department Stores, Inc. (95,700) 0
Hewlett-Packard Co.** (31,400) 40,900
International Paper Co. (119,200) 0
Motorola, Inc. (100,100) 80,000
PepsiCo, Inc. (93,900) 77,900
Telefonakteibolaget LM Ericcson,
Class B, ADR (176,000) 210,000
3Com Corp. (75,000) 0
Unilever NV ADR (33,600) 11,400
U.S. Robotics Corp. (51,400) 57,800
</TABLE>
*Excludes activity associated with Portfolio Manager change which occurred on
July 1st.
**Adjusted for stock split
4
<PAGE>
Shareholders'
Investment Growth
A report on per share values, distributions and reinvestment since the Fund's
inception
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 ten shares held; the one in October 1993 allowed
investors to acquire one share at $10.41 for every 15 shares held; and the one
in September 1994 allowed investors to acquire one share at $9.14 for every 15
shares held.
As the table on the right shows, an original share, including the rights
offering and dividend reinvestment shares, has grown to a net asset value of
$41.34 (3.530 shares times the current $11.71 net asset value per share) and a
market price value of $38.83 (3.530 shares times the current $11.00 market price
per share). Excluding the rights offering shares, an original share has grown to
2.861 shares. Thus, the original share has grown to a net asset value of $33.50
(2.861 shares times the current $11.71 net asset value per share) and a market
price value of $31.47 (2.861 shares times the current $11.00 market price per
share).
<TABLE>
<CAPTION>
[DESCRIPTION OF CHART]
Shares Shares
Shares Per Purchased Acquired Shares
Owned at Share Through Through Owned
Beginning Distri- Reinvestment Rights at End
Year of Period butions Program Offering of Period
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140
- ---------------------------------------------------------------------------
1988 1.140 0.64 .107 -- 1.247
- ---------------------------------------------------------------------------
1989 1.247 0.95 .156 -- 1.403
- ---------------------------------------------------------------------------
1990 1.403 0.90 .168 -- 1.571
- ---------------------------------------------------------------------------
1991 1.571 1.02 .171 -- 1.742
- ---------------------------------------------------------------------------
1992 1.742 1.07 .199 0.1792 2.120
- ---------------------------------------------------------------------------
1993 2.120 1.255 .266 0.1383 2.524
- ---------------------------------------------------------------------------
1994 2.524 1.00 .277 .01554 2.956
- ---------------------------------------------------------------------------
1995 2.956 1.04 .311 -- 3.267
- ---------------------------------------------------------------------------
1996
1st Quarter 3.267 0.29 .083 -- 3.350
2nd Quarter 3.350 0.30 .093 -- 3.443
3rd Quarter 3.443 0.28 .087 -- 3.530
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NAV(1) Price
Per Total Per Total
Share NAV Share Price of
at End of Shares at End Shares
Year of Period Owned of Period Owned
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
1987 $ 7.90 $ 9.01 $ 6 $ 6.84
- -------------------------------------------------------------
1988 8.29 10.34 71/4 9.04
- -------------------------------------------------------------
1989 9.58 13.44 81/4 11.57
- -------------------------------------------------------------
1990 8.92 14.01 73/4 12.18
- -------------------------------------------------------------
1991 11.20 19.51 103/4 18.73
- -------------------------------------------------------------
1992 10.78 22.85 111/8 23.59
- -------------------------------------------------------------
1993 10.40 26.25 111/8 28.08
- -------------------------------------------------------------
1994 9.26 27.37 81/2 25.13
- -------------------------------------------------------------
1995 11.03 36.04 10-7/8 35.53
- -------------------------------------------------------------
1996
1st Quarter 11.42 38.26 113/8 38.11
2nd Quarter 11.53 39.71 10-3/4 37.02
3rd Quarter 11.71 41.34 11 38.83
- -------------------------------------------------------------
</TABLE>
1) Net Asset Value
2) Rights offering completed in April 1992. One share offered at $10.05 for
every 10 shares owned.
3) Rights offering completed in October 1993. One share offered at $10.41 for
every 15 shares owned.
4) Rights offering completed in September 1994. One share offered at $9.14
for every 15 shares owned.
5) Includes the $0.18 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end price of 11-1/8.
5
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
- --------------------------------------------------------------------------------
Top 50
Holdings
As of
September 30, 1996
<TABLE>
<CAPTION>
Rank
as of Value Percent of
Rank 6/30/96 Security Name ($000) Net Assets
---- ------- ------------------------------------------ ------ ----------
<S> <C> <C> <C> <C>
1 1 Microsoft Corp. $16,629 1.7%
2 4 Monsanto Co. 14,965 1.6
3 15 Intel Corp. 14,621 1.5
4 6 Federal Home Loan Mortgage Corp. 13,703 1.4
5 5 May Department Stores Co. 13,372 1.4
6 13 Computer Associates International, Inc. 12,507 1.3
7 7 First Data Corp. 11,936 1.3
8 40 Warner-Lambert Co. 11,675 1.2
9 11 McDonnell Douglas Corp. 11,550 1.2
10 25 Columbia/HCA Healthcare Corp. 11,398 1.2
11 14 International Business Machines Corp. 11,267 1.2
12 16 Citicorp 10,875 1.1
13 9 Cisco Systems, Inc. 10,830 1.1
14 52 Union Pacific Corp. 10,731 1.1
15 46 MCI Communications Corp. 10,273 1.1
16 19 Kimberly-Clark Corp. 10,113 1.1
17 18 Boeing Co. 9,696 1.0
18 33 Pfizer, Inc. 9,653 1.0
19 24 General Electric Co. 9,237 1.0
20 27 Federal National Mortgage Assoc. 8,719 0.9
21 60 Providian Corp. 8,514 0.9
22 10 EXEL Limited 8,340 0.9
23 43 Xerox Corp. 8,071 0.8
24 29 Travelers Group, Inc. 7,860 0.8
25 30 Triton Energy Corp. 7,608 0.8
26 85 Medtronic, Inc. 7,599 0.8
27 84 Gillette Co. 7,494 0.8
28 47 Fleet Financial Group, Inc. 7,467 0.8
29 53 AFLAC, Inc. 7,455 0.8
30 2 Avon Products, Inc. 7,444 0.8
31 59 Progressive Corp. 7,443 0.8
32 93 Bausch & Lomb, Inc. 7,368 0.8
33 123 Safeway, Inc. 7,293 0.8
34 37 Service Corp. International 7,175 0.8
35 62 Cardinal Health, Inc. 7,097 0.7
36 54 Oracle Corp. 6,725 0.7
37 32 Sprint Corp. 6,609 0.7
38 56 ConAgra, Inc. 6,545 0.7
39 44 Eastman Kodak Co. 6,531 0.7
40 22 American Greetings Corp. 6,441 0.7
41 42 American Stores Co. 6,332 0.7
42 79 MBNA Corp. 6,255 0.7
43 50 HFS, Inc. 6,019 0.6
44 55 Parker-Hannifin Corp. 6,019 0.6
45 63 Arrow Electronics, Inc. 6,008 0.6
46 34 Pharmacia & Upjohn, Inc. 5,990 0.6
47 48 Exxon Corp. 5,977 0.6
48 36 Transamerica Corp. 5,939 0.6
49 NEW Allegheny Teledyne, Inc. 5,924 0.6
50 NEW Wal-Mart Stores, Inc. 5,921 0.6
</TABLE>
6
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
[Cavanna Photo]
Henry D. Cavanna
J. P. Morgan Investment
Management Inc.
Manager Interview
- -------------------------
At J. P. Morgan, a
Systematic, Proprietary
Process Uncovers
Value that Others
Overlook
J. P. Morgan Investment Management Inc. is the newest of the Fund's five
investment managers. A value style equity manager, J. P. Morgan concentrates
on individual stock selection, rather than sector rotation, style/theme
investing or market timing. Twenty-five senior research analysts rank stocks
by quintiles within 18 economic sectors. The process produces a portfolio
with above-market earnings and dividend growth, but price-to-book and
price-to-earnings ratios that are below or in line with the market. We
recently had the opportunity to interview Managing Director Henry D. Cavanna,
a senior equity portfolio manager in J. P. Morgan Investment's Equity and
Balanced Accounts Group. The Fund Manager, Liberty Asset Management Company
(LAMCO), serves as the moderator for the interview.
LAMCO: Since this is your first interview for a Fund report, perhaps we could
start with some background with regard to your firm.
Cavanna: J. P. Morgan Investment Management is a wholly-owned subsidiary of
J. P. Morgan & Co., which is a large global financial services firm whose
stock is traded on the New York Stock Exchange. J. P. Morgan Investment
Management manages about $193 billion worldwide and has some 1,500 employees.
We've been managing money for a long time, in fact, since the early 1900s on
the private client side and since the early 1940s for institutional clients.
The earlier date goes back to the old Morgan banking partnership. It's
interesting to note that in the banking crisis of 1907, before there was a
Federal Reserve System, J. P. Morgan himself stepped in and personally
provided liquidity to stem the crisis. Now, what's significant about that
little bit of history in 1907 and all the years since then is that within the
firm today there exists a culture of excellence. Essentially, it comes down
to believing in the business and providing absolutely first class service to
our clients. There are high standards of conduct here and they're inseparable
from the way we do business.
LAMCO: That sets the stage for a question concerning your investment
philosophy and style. Can you give us a summary?
Cavanna: The cornerstone of our philosophy rests on what we call an information
advantage. What we mean by that is proprietary, fundamental research performed
by a very large team of analysts that does nothing but support our investment
management efforts. This research effort is not sold to anyone, it's not
published, it has nothing to do with any other part of this organization.
The second part of our philosophy is to capture and present this research in an
organized fashion. In other words, to use this research in a more systematic way
than other firms perhaps would. We employ a dividend discount model as our
principal tool for coming up with a value and a ranking for companies that are
purchase candidates.
So, it's two things that really encompass our investment philosophy: One is to
build this information advantage through in-house, fundamental, proprietary
research. The second is to capture that research and organize it in
Continued on page 8
- --------------------------------------------------------------------------------
The views expressed in this interview represent the manager's views at the
time of discussion and are subject to change.
- --------------------------------------------------------------------------------
7
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
Continued from page 7
a disciplined fashion utilizing a dividend discount model.
LAMCO: Could you explain a little further how you use your dividend discount
model to value stocks?
Cavanna: It's a tool that can be thought of as a very simple way of coming up
with a value for a company. For instance, it can reduce General Electric--a
complicated, global company with the largest market cap in the world--to a
single number, which is its long-term expected return. A tremendous amount of
understanding and analysis goes into coming up with that number, and our
portfolio managers know a lot about that company from experience and from
meeting with management. But, right away, we can narrow the field to those
companies that look the cheapest, bearing in mind that we're not necessarily
looking for the best companies, we're looking for the most undervalued
companies.
The other desirable characteristic of a dividend discount model is that it
forces you to focus on the longer-term determinants of value. We believe
strongly that what determines whether a company is undervalued or not is its
ability to generate earnings and dividend growth on a longer-term basis, not on
a short-term basis. The market is very focused on short-term events, especially
with all the communications media and technology that make information available
instantaneously. We're trying to look at the world and--while not ignoring the
short term--focus principally on longer-term prospects.
LAMCO: How would you describe your own practice of value style investing?
Cavanna: Price will determine whether we buy something. But, our value
discipline is different than a lot of traditional value managers, many of whom
will focus more on ratios such as price/earnings, price-to-book or dividend
yield. We're trying to look ahead at a company's ability to grow on a
longer-term basis, and therefore we're looking at future P/Es, future yields,
and so forth. The other thing is that we're going to own stocks in every sector.
A value manager is generally not going to buy a consumer staple stocks, because
very few of them are ever going to be cheap. We're going to try to buy the
cheapest consumer staple stock, and we're going to buy the cheapest technology
stocks and the cheapest energy stocks. So, our sector diversification also
differentiates us from other value managers. This also ties back to our research
discipline in that we believe stock selection within market sectors, rather than
across market sectors and industry groups, is of primary importance.
LAMCO: Let's focus for a moment on your research and how it adds value.
Cavanna: We think the value of research is greater within a sector than it is
across sectors. For instance, we have an auto industry analyst who can focus 100
percent of the time on following a particular group of companies, becoming a
true industry expert. We're going to get a lot more value from that effort than
we are trying to decide whether one analyst's stocks are more attractive or less
attractive than another analyst's view of stocks in other sectors.
Creating the information advantage is where our investment process starts.
...............................................................................
". . . our investment philosophy . . . is to build an information advantage
through fundamental, proprietary research . . . and to capture that research
and organize it in a disciplined fashion utilizing a dividend discount
model."
...............................................................................
8
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
Then, we organize that information using our dividend discount model.
Ultimately, the research supports our team of eight portfolio managers that
selects among those companies that are the cheapest based on a dividend discount
ranking. By the way, that not only gives us a buy discipline, it gives us a sell
discipline.
LAMCO: Perhaps you could explain.
Cavanna: Using the dividend discount model, we arrange the stocks within an
industry group into quintiles according to their long-term expected return. We
want to buy stocks that are the cheapest--the 20 percent that are in the first
quintile or those that are in the second quintile. The flip side of that is that
once a stock appreciates in value it may move down to the fourth or fifth
quintile, and at that point a lot of its future value is reflected in its
current stock price and it is a candidate to be sold. We're going to sell and
reinvest all over again in another company whose prospects haven't been
realized.
There is also a qualitative factor in this. It's the art in the business--the
confidence and judgment that come from experience and from meeting managements
and gaining a deeper understanding of these companies. We also try to look for a
catalyst--something that will trigger the realization of value over a one-year
time frame. This catalyst can be a new product, new strategic initiative,
reorganization, cost cutting, or some combination of individual factors.
Sometimes, it could be external; maybe the business is depressed on a cyclical
basis and you expect that's going to change.
...............................................................................
". . . our value discipline is different than a lot of traditional value
managers . . . we're trying to look ahead at a company's ability to grow on a
long-term basis . . . and we're going to own stocks in every sector."
...............................................................................
LAMCO: Can you give us an example of the process in action?
Cavanna: Union Carbide is a good one. The consensus forecast assigns Union
Carbide a mediocre industry ranking. But, we draw a different conclusion--in
large part because we're willing to take a longer term view of Union Carbide.
That's because, above all, it's a basic industry company and its earnings are
going to be heavily influenced by the chemical industry cycle. It has a big
position in many commodity chemical products. During a period of time, such as
the present, when the chemical cycle is past its peak and the economy appears to
be slowing, the market will conclude, if it focuses on short-term prospects for
Union Carbide, that the company's earnings will decline relative to prior
periods.
But we see a larger and larger percentage of this company being less
susceptible to economic cycles. We estimate that more than three-quarters of the
company's earnings come from less cyclical specialty and intermediate chemicals.
In addition, we've met Union Carbide management many times and we know this
company continues to cut costs, has entered into a number of joint ventures that
leverage its process technology and that it is a company that's very sensitive
to increasing shareholder value. All of this gives us a high degree of
confidence that even if the value doesn't get recognized by the market,
management will take steps to realize shareholder value.
LAMCO: Can you tell us about one or two other stocks that are in the Fund's
portfolio as a result of your approach?
Cavanna: We recently added Forest Labs, a mid-sized drug
Continued on page 10
9
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
Continued from page 9
company. Forest Labs doesn't do any basic research, like a lot of drug
companies. What it does is license from other companies around the world. Forest
Labs has been a high growth company for the last 15 years, averaging 20 to 25
percent growth annually over that period. But, it recently stumbled. Fiscal year
earnings are going to go from more than $2 a share to something around $1.30.
This is where Morgan gets interested.
We know this company very well and we know that its earnings came under
pressure partly because of product transition, which is a big deal in a drug
company, and partly because Forest Labs increased its spending to build up a
larger sales force to market new drugs in the future. So, it is in between on
the product side and it is increasing expenses to build for the future. Through
our own analysis and contacts with management, we feel sufficiently confident
that this is a temporary phenomena and that we will start seeing a resumption in
traditional growth rates during the next 12 months. At some point within the
next two to three years we will see earnings of $3 or more a share for this
company.
Another one is First USA, a leading credit card issuer. Over the past six
months, credit delinquencies have been rising and we're late in the economic
cycle, a time when you start to see people delay paying off their credit card
balances. Those factors impact investors' attitudes towards companies that are
totally dependent on credit cards. Why would we own First USA? Number one, it's
a very good credit card company. We think of First USA as a very low cost
provider. What's more, consumer credit, while it may be cyclical, continues to
add to its share of credit transactions. And, fears of the credit cycle has led
investors to assign very little premium to this company's ability to grow longer
term. We think that First USA will manage its way through this short-term
stress and look very attractive in the future.
One more company is interesting because we sold it and bought it back--albeit
with a little twist. Keep in mind that two things are going to lead us to sell:
price, which is the most important, and an increase in the value of a stock
within its sector. NationsBank is a super regional bank that, purely on a price
basis, went from the first to the third quintile and was sold. Then, it acquired
Boatmen's Bank of St. Louis in an $8.7 billion deal. Its stock declined from the
low 90s to the low 80s, but we had sold our position prior to the announcement
of the acquisition. However, when we heard management's rationale for the
acquisition and its plans for the future, we looked at the stock very closely.
We decided we could buy it more cheaply by investing in Boatmen's stock rather
than NationsBank because Boatmen's was selling at a discount. Once the
acquisition is complete, this should prove to be an effective way to have
repurchased NationsBank.
LAMCO: Do you have another example of your sell discipline at work?
Cavanna: Yes, a company we've sold is Melville, which is a retailer that has
gone through a major reorganization by selling off a lot of businesses. It sold
Marshall's; a toy business, K-Bee Toys; and it's in the process of spinning off
its shoe business, Footstar, which includes Thom McCann. What Melville is going
to be left with is CVS, our favorite discount drug chain. Going forward, CVS
will account for virtually the entire company. All of these steps have been
taken over the last year and we were benefiting from them. But, the stock now
...............................................................................
"We try to look for a catalyst -- something that will trigger the realization of
value over a one-year time frame."
...............................................................................
10
<PAGE>
--------------------------------
LIBERTY ALL * STAR EQUITY FUND
commands a discount drug P/E multiple, and that is much higher than the old
Melville. CVS is one of the best regional drug chains, but it's no longer
inexpensive. It's probably on the radar screens of managers who are much more
growth oriented than we are. For someone who has a value discipline like ours,
there wasn't a whole lot more value on the table, so we sold Melville.
LAMCO: A final question. Would you comment on your long-term performance
target, which is to return two percent (before fees and expenses) over the
S&P 500 Index? Over most longer-term periods you've reached your goal--even
though the S&P benchmark has performed exceptionally well in recent years.
Cavanna: We're pleased that we have reached that goal. It's fair to say that if
we maintain our information advantage, have good people doing the analysis,
continue to follow our process in a disciplined fashion and diversify by sector,
we should be able to add value over the market by providing an excess return of
around two percent. Equally important, over the longer term we should also be
able to deliver more consistent returns.*
Distribution Policy
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to
pay distributions on its common shares totaling approximately 10% of its net
asset value per year, payable in four quarterly installments of 2.5% of 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% 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%
pay-out policy, the Fund may, in its discretion, retain and not distribute net
long-term capital gains to the extent of such excess, and has elected to do so
for 1996 (see enclosed Important Tax Notice).
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 2.861 shares as of September 30, 1996.
These shares have a total net asset value of $33.50. Shareholders are kept
apprised of the status of their account through quarterly statements.
For complete information and enrollment forms, please call Investor
Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern time.
11
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Schedule of Investments as of September 30, 1996
(Unaudited)
Common Stocks (97.7%)
<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Aerospace (2.4%)
Boeing Co. 102,600 $ 9,695,700
Lockheed Martin Corp. 20,500 1,847,562
McDonnell Douglas Corp. 220,000 11,550,000
------------
23,093,262
------------
Auto, Tires & Accessories (0.9%)
AutoZone, Inc. (a) 131,800 3,822,200
Cooper Tire & Rubber Co. 111,300 2,406,862
General Motors, Inc. 54,800 2,630,400
------------
8,859,462
------------
Banks (5.2%)
BankAmerica Corp. 10,500 862,312
Boatmen's Bancshares 33,600 1,877,400
Chase Manhattan Corp. 59,900 4,799,488
Citicorp 120,000 10,875,000
Corestates Financial Corp. 70,000 3,027,500
First Chicago NBD Corp. 58,200 2,633,550
First Hawaiian, Inc. 31,000 961,000
Firstar Corp. 44,200 2,132,650
Fleet Financial Group, Inc. 167,800 7,467,100
MBNA Corp. 180,000 6,255,000
NationsBank Corp. 33,100 2,875,563
Standard Federal Bankcorporation 42,300 1,935,225
Summit Bancorp 30,000 1,192,500
Wells Fargo & Co. 12,000 3,120,000
------------
50,014,288
------------
Broadcasting & Cable (0.9%)
British Sky Broadcasting Group ADR 80,000 4,400,000
Tele-Communications Liberty Media, Inc., Class A (a) 75,350 2,156,894
Turner Broadcasting Systems 44,100 1,245,825
Viacom, Inc., Class B (a) 19,300 685,150
------------
8,487,869
------------
Business Services (1.8%)
AccuStaff, Inc. (a) 70,000 1,811,250
Autodesk, Inc. 26,300 680,512
Electronic Data Systems Corp. 50,000 3,068,750
First Data Corp. 146,227 11,935,779
------------
17,496,291
------------
Chemicals (2.6%)
Dupont (E.I.) De Nemours & Co. 33,800 2,982,850
IMC Global 38,400 1,502,400
Monsanto Co. 410,000 14,965,000
Union Carbide Corp. 123,400 5,630,125
------------
25,080,375
------------
Computer & Business Equipment (10.3%)
Adobe Systems, Inc. 21,800 812,050
Advanced Micro Devices,
Inc. (a) 46,000 678,500
Apple Computer 95,100 2,110,031
Broderbund Software, Inc. (a) 20,500 594,500
Ceridian Corp. (a) 40,000 2,000,000
Computer & Business Equipment (continued)
Cisco Systems, Inc. (a) 174,500 $ 10,829,906
Computer Associates International, Inc. 209,325 12,507,169
Computer Sciences Corp. (a) 40,000 3,075,000
Danka Business Systems ADR 40,000 1,590,000
HBO & Co. 40,400 2,696,700
Hewlett-Packard Co. 40,900 1,993,875
Intel Corp. 153,200 14,621,025
International Business Machines Corp. 90,500 11,267,250
Microsoft Corp. (a) 126,100 16,629,437
Oracle Corp. (a) 158,000 6,724,875
Softkey International, Inc. (a) 41,900 811,813
SunGard Data Systems,
Inc. (a) 30,000 1,350,000
Xerox Corp. 150,500 8,070,562
------------
98,362,693
------------
Construction (1.4%)
Foster-Wheeler Corp. 125,800 5,503,750
Masco Corp. 170,000 5,100,000
USG Corp. (a) 90,300 2,675,138
------------
13,278,888
------------
Consumer Products (2.4%)
Gucci Group NV ADR 40,000 2,900,000
Nike, Inc., Class B 20,100 2,442,150
Procter & Gamble Co. 48,700 4,748,250
Ralston-Ralston Purina Group 48,400 3,315,400
Tommy Hilfiger Corp. (a) 42,000 2,488,500
Unilever NV ADR 11,400 1,796,925
Whirlpool Corp. 108,200 5,477,625
------------
23,168,850
------------
Cosmetics & Toiletries (1.8%)
Avon Products, Inc. 150,000 7,443,750
Colgate-Palmolive Co. 10,700 929,563
Gillette Co. 103,900 7,493,788
International Flavors & Fragrances, Inc. 23,000 1,003,375
------------
16,870,476
------------
Diversified (3.5%)
AlliedSignal, Inc. 42,200 2,779,925
Coltec Industries (a) 59,900 958,400
Cooper Industries, Inc. 70,300 3,040,475
General Electric Co. 101,500 9,236,500
Hanson PLC ADR 370,000 4,578,750
ITT Industries, Inc. 38,900 938,463
Minnesota Mining & Manufacturing Co. 73,800 5,156,775
Parker-Hannifin Corp. 143,300 6,018,600
Temple-Inland, Inc. 10,900 574,975
------------
33,282,863
------------
Drugs & Health Care (11.7%)
Alza Corp. (a) 98,400 2,644,500
American Home Products Corp. 77,000 4,908,750
Amgen, Inc. (a) 70,000 4,418,750
</TABLE>
12
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Schedule of Investments (continued)
Common Stocks -- continued
<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Drugs & Health Care (continued)
Bausch & Lomb, Inc. 200,500 $ 7,368,375
Boston Scientific Corp. (a) 55,000 3,162,500
Cardinal Health, Inc. 85,900 7,097,488
Ciba-Geigy AG ADR 89,500 5,739,188
Columbia/HCA Healthcare Corp. 200,400 11,397,751
Elan Corp. ADR (a) 70,000 2,091,250
Forest Laboratories, Inc. (a) 72,400 2,615,450
HEALTHSOUTH Corp. (a) 100,000 3,837,500
Humana, Inc. (a) 139,400 2,822,850
Johnson & Johnson 111,700 5,724,625
Medtronic, Inc. 118,500 7,598,812
Merck & Co., Inc. 75,000 5,278,125
Oxford Health Plans, Inc. (a) 80,000 3,980,000
Pfizer, Inc. 122,000 9,653,250
Pharmacia & Upjohn, Inc. 145,200 5,989,500
SmithKline Beecham ADR 29,800 1,814,075
United Healthcare Corp. 48,900 2,035,463
Warner-Lambert Co. 176,900 11,675,400
------------
111,853,602
------------
Electrical Utilities (0.8%)
Schedule of Investments (continued) 50,000 1,968,750
Entergy Corp. 28,400 766,800
Illinova Corp. 23,700 628,050
Pacific Gas & Electric Co. 85,100 1,850,925
Pinnacle West Capital Corp. 30,400 900,600
Western Resources, Inc. 51,700 1,505,762
------------
7,620,887
------------
Electronics & Electrical Equipment (4.2%)
Adaptec, Inc. (a) 57,500 3,450,000
Analog Devices, Inc. (a) 70,000 1,898,750
Arrow Electronics, Inc. (a) 135,000 6,007,500
Atmel Corp. (a) 82,400 2,544,100
EMC Corp. (a) 89,300 2,020,412
General Instruments Corp. (a) 85,100 2,106,225
General Motors Corp.,
Class H 48,800 2,818,200
Grainger (W.W.), Inc. 21,100 1,482,275
Harris Corp. 28,500 1,856,062
Honeywell, Inc. 51,600 3,257,250
Perkin-Elmer Corp. 37,900 2,193,462
Raytheon Co. 105,000 5,840,625
Sensormatic Electronics Corp. 45,600 815,100
Tyco International Ltd. 85,400 3,682,875
------------
39,972,836
------------
Financial Services (7.0%)
Associates First Capital Corp. 86,100 3,530,100
Countrywide Credit Industries, Inc. 150,000 3,843,750
CUC International, Inc. (a) 60,000 2,392,500
Dean Witter Discover & Co. (a) 33,000 1,815,000
Federal Home Loan Mortgage Corp. 140,000 13,702,500
Federal National Mortgage Assoc. 250,000 8,718,750
Financial Services (continued)
First USA, Inc. 92,600 $ 5,127,725
Green Tree Financial Corp. 129,600 5,086,800
H & R Block, Inc. 135,000 4,016,250
Merrill Lynch & Co., Inc. 40,700 2,670,937
Morgan Stanley Group, Inc. 110,000 5,472,500
Paychex, Inc. 42,000 2,436,000
Travelers Group, Inc. 160,000 7,860,000
------------
66,672,812
------------
Food & Beverage (2.2%)
Campbell Soup Co. 23,200 1,809,600
ConAgra, Inc. 132,900 6,545,325
CPC International 22,000 1,647,250
Dole Foods, Inc. 140,000 5,880,000
Kellogg Co. 42,700 2,940,963
PepsiCo, Inc. 77,900 2,200,675
------------
21,023,813
------------
Hotels & Leisure (1.8%)
Brunswick Corp. 230,000 5,520,000
HFS, Inc. (a) 90,000 6,018,750
Hilton Hotels Corp. 104,800 2,973,700
Mirage Resorts, Inc. (a) 100,000 2,562,500
------------
17,074,950
------------
Industrial Equipment (0.4%)
Crown Cork & Seal Co., Inc. 72,000 3,321,000
------------
Insurance (5.9%)
AFLAC, Inc. 210,000 7,455,000
Allstate Corp. 95,900 4,723,075
American International Group, Inc. 45,000 4,533,750
Aon Corp. 102,450 5,557,912
EXEL Limited 240,000 8,340,000
MGIC Investment Corp. 55,000 3,705,625
Progressive Corp. 130,000 7,442,500
Providian Corp. 198,000 8,514,000
Transamerica Corp. 85,000 5,939,375
------------
56,211,237
------------
Metals & Mining (1.3%)
Allegheny Teledyne, Inc. 261,827 5,923,836
Aluminum Co. of America 24,200 1,427,800
Freeport-McMoRan Copper & Gold, Inc., Class A 175,000 5,468,750
------------
12,820,386
------------
Oil & Gas (7.1%)
Anadarko Petroleum Co. 36,800 2,056,200
Atlantic Richfield Co. 29,700 3,786,750
Burlington Resources, Inc. 38,400 1,704,000
Diamond Shamrock, Inc. 60,600 1,886,175
Enron Corp. 67,800 2,762,850
Exxon Corp. 71,800 5,977,350
Kerr-McGee Corp. 71,200 4,334,300
Mobil Corp. 45,100 5,220,325
Repsol SA ADR 144,500 4,786,563
Royal Dutch Petroleum Co. ADR 37,300 5,823,463
</TABLE>
13
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
Schedule of Investments (continued)
Common Stocks -- continued
<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Oil & Gas (continued)
Schlumberger Ltd. 64,100 $ 5,416,450
Sonat, Inc. 41,700 1,845,225
Sun Co., Inc. 92,800 2,134,400
Texaco, Inc. 62,600 5,759,200
Tosco Corp. 30,000 1,646,250
Triton Energy Corp. (a) 170,000 7,607,500
USX-Marathon Group 234,800 5,077,550
------------
67,824,551
------------
Paper (1.8%)
Champion International Corp. 120,000 5,505,000
Georgia-Pacific Corp. 24,400 1,930,650
Kimberly-Clark Corp. 114,756 10,112,873
------------
17,548,523
------------
Photographic Equipment & Supplies (0.7%)
Eastman Kodak Co. 83,200 6,531,200
------------
Pollution Control (0.8%)
Republic Industries, Inc. (a) 100,000 2,900,000
WMX Technologies, Inc. 139,700 4,592,637
------------
7,492,637
------------
Publishing (2.0%)
American Greetings Corp. 225,000 6,440,625
Gannett Co., Inc. 78,600 5,531,475
R.R. Donnelley & Sons Co. 120,000 3,870,000
Time Warner, Inc. 81,300 3,140,212
------------
18,982,312
------------
Retail Trade (5.6%)
American Stores Co. 158,300 6,332,000
Circuit City Stores, Inc. 62,600 2,261,425
Dayton Hudson Corp. 76,500 2,524,500
Home Depot, Inc. 67,900 3,861,812
May Department Stores Co. 275,000 13,371,875
Safeway, Inc. (a) 171,100 7,293,138
Staples, Inc. (a) 231,900 5,145,282
Toys R Us, Inc. (a) 174,000 5,067,750
Wal-Mart Stores, Inc. 224,500 5,921,187
Wendy's International, Inc. 88,700 1,907,050
------------
53,686,019
------------
Services (0.8%)
Service Corp. International 237,200 $ 7,175,300
------------
Telecommunications (7.5%)
Ascend Communications,
Inc. (a) 36,400 2,406,950
Asia Satellite Telecommunications Holding Ltd. ADR (a) 50,000 1,343,750
AT&T Corp. 51,200 2,675,200
Bay Networks, Inc. (a) 35,700 972,825
Bell Atlantic Corp. 15,500 928,062
British Telecommunications PLC ADR 15,000 838,125
GTE Corp. 47,700 1,836,450
Lucent Technologies, Inc. 118,800 5,449,950
MCI Communications Corp. 400,900 10,273,062
Motorola, Inc. 80,000 4,130,000
Nokia Corp. ADR 110,000 4,867,500
QUALCOMM, Inc. (a) 53,800 2,286,500
SBC Communications, Inc. 89,500 4,307,188
Sprint Corp. 170,000 6,608,750
Tele-Communications TCI Group, Class A (a) 236,200 3,528,237
Tele Danmark ADR 60,000 1,417,500
Telefonakteibolaget LM Ericsson, Class B, ADR 210,000 5,328,750
U.S. Robotics Corp. (a) 57,800 3,735,325
US West Communications Group 91,900 2,734,025
Worldcom, Inc. (a) 256,100 5,474,137
------------
71,142,286
------------
Transportation (2.8%)
AMR Corp. (a) 70,000 5,573,750
Burlington Northern, Inc. 66,500 5,610,938
Consolidated Freightways 75,200 1,842,400
Southwest Airlines Co. 112,800 2,580,300
Union Pacific Corp. 146,500 10,731,125
------------
26,338,513
------------
Total Common Stocks (Cost $686,629,630) 931,288,181
------------
</TABLE>
<TABLE>
<CAPTION>
Interest Maturity Par
Short-term Investments (3.1%) Rate Date Value Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper (2.3%)
American Express Credit Corp. 5.29% 11/12/96 $6,000,000 $ 6,000,000
Bell Atlantic Network Funding Corp. 5.31 10/08/96 2,000,000 1,997,935
Beneficial Corp. 5.32 10/03/96 2,300,000 2,299,320
Chevron Oil Financial 5.28 10/10/96 960,000 958,733
Dean Witter Discover 5.30 10/04/96 2,000,000 1,999,117
Exxon Asset Management 5.18 10/01/96 2,400,000 2,400,000
Goldman Sachs Group 5.34 10/10/96 1,500,000 1,497,998
Prudential Funding Corp. 5.40 10/08/96 2,100,000 2,097,795
UBS Financial 5.33 10/03/96 3,000,000 2,999,112
-----------
22,250,009
-----------
</TABLE>
14
<PAGE>
------------------------------
LIBERTY ALL * STAR EQUITY FUND
<TABLE>
<CAPTION>
Market Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement (0.8%)
Lehman Securities Corp. dated 09/30/96, 5.68%, to be purchased at $7,549,190 on 10/01/96,
collateralized by U.S. Treasury notes with various maturities to 2019, with a current market value
of $7,732,320 $ 7,548,000
------------
Total Short-term Investments (Cost $29,798,009) 29,798,009
------------
Total Investments (100.8%) (Cost $716,427,639) 961,086,190
------------
Other Assets and Liabilities, Net (-0.8%) (7,495,079)
------------
Net Assets (100.0%) $953,591,111
============
Net Asset Value Per Share (81,444,895 shares outstanding) $11.71
============
Notes to Schedule of Investments:
(a) Non-income producing security.
Gross unrealized appreciation and depreciation of investments at September
30, 1996 is as follows:
Gross unrealized appreciation $256,314,949
Gross unrealized depreciation (11,656,398)
------------
Net unrealized appreciation $244,658,551
============
</TABLE>
Acronym Name
- ------- ---------------------------
ADR American Depository Receipt
Per Share
Changes in
Net Assets
<TABLE>
<CAPTION>
Nine months
ended Year ended December 31,
September 30, 1996 -----------------------------------------------------
(Unaudited) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $11.03 $ 9.26 $10.40 $10.78 $11.20 $ 8.92
------ ------ ------ ------ ------ ------
Net investment income 0.07 0.10 0.11 0.12 0.16 0.17
Distributions declared (0.87) (1.04) (1.00) (1.07) (1.07) (1.02)
Change due to rights offering (0.05)(a) (0.03)(a) (0.05)(a)
Net realized and unrealized gain
(loss) on investments 1.48 2.71 (0.20) 0.78 0.54 3.13
Provision for Federal income tax (0.18)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.71 $11.03 $ 9.26 $10.40 $10.78 $11.20
====== ====== ====== ====== ====== ======
</TABLE>
(a) Effect of ALL-STAR's rights offering for shares at a price below net
asset value.
15
