[Front Cover]
[Colored Artwork: Each word centered in varied brown-colored boxes
formed to make one large box]
VALUE CONSISTENCY
OBJECTIVITY GROWTH
..........................................
[Logo] LIBERTY
ALL [star symbol] STAR
----------------------
EQUITY FUND
ANNUAL REPORT 1997
<PAGE>
[Inside Front Cover]
[Logo] LIBERTY
ALL [star symbol] STAR
----------------------
EQUITY FUND
................................................................................
Why should the benefits of institutional-like
investing be reserved for institutions?
ONE OF THE MOST THOROUGH, SOPHISTICATED, DELIBERATE FORMS OF INVESTMENT
MANAGEMENT IS THAT PROVIDED ON BEHALF OF MAJOR INSTITUTIONS, INCLUDING LARGE
CORPORATE PENSION PLANS, MAJOR FOUNDATIONS AND UNIVERSITY ENDOWMENT FUNDS.
ALTOGETHER, THEIR ASSETS EXCEED $6 TRILLION IN THE UNITED STATES ALONE.
IN LATE 1986, LIBERTY ALL-STAR EQUITY FUND ("ALL-STAR" OR THE "FUND") WAS
FORMED SPECIFICALLY TO BRING THE BENEFITS OF INSTITUTIONAL-LIKE INVESTING TO
YOU, THE INDIVIDUAL INVESTOR.
GENERALLY SPEAKING, THE INSTITUTIONAL INVESTING PROCESS IS CHARACTERIZED BY
THE STRATEGIC ALLOCATION OF ASSETS TO MULTIPLE MANAGERS WHO PRACTICE DIFFERENT
INVESTING STYLES. CAREFULLY SELECTED TO MEET SPECIFIC INVESTMENT OBJECTIVES,
THE MANAGERS ARE RIGOROUSLY MONITORED. SHOULD THEY FAIL TO MEET THE
PERFORMANCE OBJECTIVES SET OUT FOR THEM, THEY ARE REPLACED BY THOSE WHO CAN.
LIBERTY ASSET MANAGEMENT COMPANY ("LAMCO") HAS ADAPTED THIS PROCESS TO DEVELOP
A SPECIFIC INVESTMENT PROGRAM FOR ALL-STAR. A MORE DETAILED DESCRIPTION OF
THIS PROGRAM IS CONTAINED ON PAGES 8 THROUGH 11.
IF THERE'S ONE THING THIS TYPE OF INVESTING CAN BE COUNTED ON TO DELIVER, IT'S
CONSISTENT RESULTS. AND OUR GOALS FOR ALL-STAR HAVE ALWAYS BEEN
BETTER-THAN-AVERAGE LONG-TERM RETURNS AND BETTER-THAN-AVERAGE CONSISTENCY,
COMPARED WITH OTHER MAJOR GROWTH AND INCOME FUNDS.
ON THIS ELEVENTH ANNIVERSARY OF ALL-STAR, WE RENEW OUR COMMITMENT TO BRING TO
THE FUND THE BEST APPLICABLE INSTITUTIONAL INVESTMENT MANAGEMENT PRACTICES AS
THEY CONTINUE TO EVOLVE.
LIBERTY ASSET MANAGEMENT COMPANY
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Ten Years of Better-than-Average Returns and Better-than-Average
Consistency Compared with Other Major Growth and Income Funds
[Growth & Income Chart: dot representation for the past 10-years]
HIGH
RETURN
HIGH
CONSISTENCY BETTER
All-Star's
high return and All-Star [star symbol]
high consistency
combination is
well-placed
among the
universe of funds.
Each dot represents the precise return and consistency of one fund over the past
10 years (January 1, 1988, through December 31, 1997) in the universe of 48
Growth & Income Funds (as classified by both Morningstar, Inc. and Lipper
Analytical Services, Inc.) that had at least $100 million in net assets at the
beginning of the 10 year period.
Consistency is measured by examining the volatility of "non-market" monthly
returns, calculated by subtracting the return of the S&P 500 Stock Index from
each mutual fund's return. The lower the volatility, the higher the consistency
of results compared with the stock market.
WORSE
LOW
CONSISTENCY
LOW
RETURN
THE THREE LIBERTY ALL-STAR FUNDS
A companion fund to Liberty All-Star Equity Fund is also listed on the New
York Stock Exchange, Liberty All-Star Growth Fund, Inc. In addition, a variable
annuity version of Liberty All-Star Equity Fund is now available as part of the
Keyport Advisor variable annuity from Keyport Life Insurance Company, one of the
Liberty Financial companies as is Liberty Asset Management Company. Variable
annuities, among other features, offer a way to accumulate retirement funds on a
tax-deferred basis and to distribute those funds efficiently after retirement.
<TABLE>
<CAPTION>
NYSE PREMIUM/
FUND TICKER FUND (DISCOUNT)
NAME TYPE SYMBOL OBJECTIVE AT 1/31/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liberty All-Star Closed-End USA Growth & Income 0.6%
Equity Fund
Liberty All-Star Closed-End ASG Growth (4.0)%
Growth Fund, Inc.
Liberty All-Star Equity Open-End, -- Growth & Income, --
Fund, Variable Series Variable Annuity Variable Annuity
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information on all three funds is available from your broker.
You may also contact Investor Assistance at 1-800-LIB-FUND (1-800-542-3863) for
information about either of the closed-end funds. For the variable annuity fund,
you may call Keyport at 1-800-367-3653.
---------[1]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
1997 Annual Report Chairman's Letter
To Our Fellow Shareholders: February 1998
The net asset value (NAV) of a common share of the Fund declined from
$14.01 on September 30, 1997, to $13.32 on December 31, 1997, after deducting
the distribution of 34 cents declared during the quarter and making provision of
36 cents for taxes related to retained realized gains. The market price of a
share of the Fund traded in a range from $11.75 to $14.75 before closing the
quarter at $13.313. The ending price represented a discount to NAV of 0.1
percent compared with a premium to NAV of 0.8 percent on September 30, 1997. Key
investment results and comparisons are noted below.
As the table shows, the Fund's net asset value increased 0.1 percent during
the fourth quarter of 1997, which compares with 0.8 percent for the Lipper
Growth & Income Mutual Fund Average (the Fund's primary benchmark) and 2.9 and 0
percent for the S&P 500 Index and Dow Jones Industrial Average, respectively.
For the full year 1997, the Fund's net asset value was up 26.8 percent compared
with 27.0 percent for the Lipper Growth &Income Mutual Fund Average and 33.4 and
24.9 percent for the S&P 500 and the Dow Jones, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Fourth Quarter Full Year
---------------------------------------------------------------------------------------------
<S> <C> <C>
LIBERTY ALL-STAR EQUITY FUND:
Shares Valued at Net Asset Value 0.1% 26.8%
Shares Valued at Market Price
With Dividends Reinvested (0.7)% 34.4%
Fund's Closing Price Range $14.625 to $12.563 $14.625 to $11.25
Fund's (Discount)/Premium Range (5.8)% to 2.3% (9.2)% to 2.3%
Lipper Growth & Income Mutual Fund Average 0.8% 27.0%
S&P 500 Stock Index 2.9% 33.4%
Dow Jones Industrial Average 0.0% 24.9%
NASDAQ Composite Index (6.8)% 21.6%
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 Stock Index and the Dow Jones Industrial Average are
total returns including income. Figures for the unmanaged NASDAQ Index are total returns
excluding income.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
---------[2]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
1997 Annual Report Chairman's Letter
The stock market, as measured by the S&P 500 Stock Index, continued its
advance for the twelfth quarter in a row, a string that has never been matched
in the 41 year history of the S&P 500. The overall performance of the S&P 500
during the fourth quarter of 1997, however, masked an underlying weakness
stemming from Asian financial turmoil, the most significant negative factor to
impact the equity markets since the sharp rise in interest rates in 1993-94. For
the first time since 1990, there was a corre ction in the S&P 500 of more than
10 percent. From its peak of 983.12 on October 7, that index dropped 10.8
percent in three weeks, then rebounded to a new high on December 5. The rebound,
however, was largely a flight-to-quality and benefited mostly the large blue
chip stocks.
As we go to press with this report, concern over the Asian turmoil seems to
have abated somewhat. The S&P 500 and the Dow have set new all-time highs and
the NASDAQ is close to its high.
All of us can and should take satisfaction from the fact that the Fund has
produced a total NAV return of 103.1 percent (more than doubling our money)
during the past three years. At the same time, we do well to temper our
expectations for the future. The still high level of the market together with
present uncertainties and volatility suggest caution.
It is worth noting, once again, that the Fund has been essentially fully
invested in equities over the last eleven years. We expect that to continue,
absent unusual circumstances. Market timing is not part of the multi-managed
methodology LAMCO brings to the Fund. And, we continue to have confidence in our
multi-management approach, which has served us well for the past eleven years.
The Board of Trustees has authorized and set the terms for an offering to
shareholders of rights to purchase additional shares of the Fund. Shareholders
will be issued non-transferable rights entitling them to subscribe for one
additional share for every 20 shares held, with the right to subscribe for
additional shares not subscribed for by others on primary subscription. The
subscription price will be 95% of the lower of the closing market price or net
asset value on the business day following the expiration of the subscription
period. The rights offering is subject to the effectiveness of the Fund's
registration statement with the Securities and Exchange Commission and will be
made only by means of a Prospectus to be mailed to shareholders. Subject to the
registration statement's effectiveness, it is anticipated that the offering will
commence in late March and continue for approximately 30 days.
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.
---------[3]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
1997 Annual Report President's Letter
To Our Fellow Shareholders: February 1998
It has been a remarkable three years, 1995-97. We have experienced an
extraordinary environment with an unprecedented third consecutive year of 20%
plus gains. The S&P 500 has been up every quarter. The Fund has doubled our
money. We've upgraded our manager line-up with three new Portfolio Managers. The
Fund was ranked number one among the five closed-end funds categorized as growth
and income by Lipper Analytical Services, Inc. for the ten year period ended
December 31, 1997.
In prior reports, we pointed out that the S&P 500 had not had a correction
of as much as 10 percent since 1990, the longest such period without such a
correction in the history of the S&P 500 Stock Index. That record came to an end
in the second half of 1997.
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 seven years since 1990, we have had four such
corrections, all mild compared with those of 1987 and 1990. The two 1997
corrections were the shortest of all.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DEPTH OF RECOVERY TIME TOTAL TIME
YEAR CORRECTION CORRECTION CORRECTION TIME (from trough (from previous peak
BEGAN (from peak to trough) (from peak to trough) to new peak) to new peak)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1987 34% 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
1997 - 1st 9 1 1 2
- 2nd 11 1 1 2
- ------------------------------------------------------------------------------------------------------------
</TABLE>
We also saw unusual volatility in 1997. Besides the two corrections shown
in the table, there was larger than normal volatility of growth and value styles
during the year. The chart on the following page shows the cumulative relative
performance of the growth and value styles as defined by the Russell 1000
Indices. The Russell 1000 Index consists of the 1000 largest U.S. Stocks
determined by total market capitalization. The Russell 1000 Value Index contains
those securities in the Russell 1000 Index with a value, as opposed to growth,
orientation. Companies in this index generally have low price-to-book and
price/earning ratios, higher dividend yields, and lower forecasted
---------[4]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
1997 Annual Report Chairman's Letter
growth rates. The Russell 1000 Growth Index contains those securities in the
Russell 1000 with a greater-than-average growth orientation. Companies in this
index tend to exhibit characteristics opposite to those of the Russell 1000
Value Index. Therefore, these two style indices are good proxies for the
performance of the growth and value styles of investment management.
[Line Chart Begin]
12/96 0.00% Growth
1/97 2.16% Outperformed
2/97 -0.11% Value
3/97 -2.03%
4/97 0.34%
5/97 2.11%
6/97 1.86%
7/97 3.58%
8/97 0.47%
9/97 -0.87%
10/97 -2.02% Value
11/97 -2.31% Outperformed
12/97 -4.71% Growth
[Line Chart end]
As can be seen, growth outperformed value at the beginning of the year.
Leadership shifted to value during February and March. Growth dominated in the
April through July period. Finally, investors shifted their focus back to value
stocks in the last five months. This resulted in the value style, as defined by
Russell, outperforming growth by 4.7% for 1997. The Fund's blend of growth and
value styles among the five Portfolio Managers helped it maintain greater
consistency through the year.
Thank you for your continuing support of the Fund.
Sincerely,
/s/ Richard R. Christensen
- --------------------------
Richard R. Christensen
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
---------[5]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Shareholders' Investment Growth
December 31, 1997
- ------------------------------[Mountain Chart]---------------------------------
Net Asset Value of Additional
Shares Acquired Investments
Net Asset Value Through Dividend Made Through
of One Share Reinvestment Rights Offerings
------------ ------------ ----------------
Jan-87 10.17 10.17 10.17
Feb-87 10.87 10.87 10.87
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 11.62 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 8.47
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 17.65
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 20.57 22.64
Dec-92 10.78 20.76 22.85
Jan-93 10.86 20.82 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 28.25
Jan-94 10.77 23.28 27.18
Feb-94 10.34 22.81 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 25.83
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 21.97 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 25.48 31.44
Jun-95 10.53 26.49 32.69
Jul-95 10.95 27.55 33.89
Aug-95 10.74 27.73 34.21
Sep-95 11.05 28.53 35.19
Oct-95 10.93 28.22 34.81
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 10.86 30.36 37.45
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 44.61
Dec-96 11.95 35.54 43.86
Jan-97 12.65 37.62 46.43
Feb-97 12.56 37.32 46.06
Mar-97 11.73 35.81 44.19
Apr-97 12.19 37.22 45.92
May-97 12.77 39.96 49.30
Jun-97 13.31 41.65 51.39
Jul-97 14.29 44.71 55.17
Aug-97 13.34 42.81 52.83
Sep-97 14.01 44.96 55.48
Oct-97 13.51 43.35 53.60
Nov-97 13.52 44.49 54.92
Dec-97 13.32 45.02 55.57
$55.57 and $45.02--To evaluate your investment in All-Star, these values should
be used. Each shows how your investment has fared by keeping distributions at
work in the Fund. The upper value includes additional investments made through
rights offerings in 1992, 1993 and 1994.
$13.32--This is the net asset value of one share of All-Star as of 12/31/97.
- --------------------------------------------------------------------------------
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 $55.57 (4.172 shares times the current $13.32 net asset value
per share) and a market price value of $55.54 (4.172 shares times the current
$13.313 market price per share). Excluding the rights offerings shares, an
original share has grown to 3.380 shares. Thus, the original share has grown to
a net asset value of $45.02 (3.380 shares times the current $13.32 net asset
value per share) and a market price value of $45.00 (3.380 shares times the
current $13.313 market price per share).
---------[6]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
A Table of Per-Share Values, Distributions and Reinvestment
Since All-Star's Inception
<TABLE>
<CAPTION>
Shares Shares Market Total
Shares Per Purchased Acquired Shares NAV(1) Total Price Per Market
Owned At Share Through Through Owned Per Share NAV Of Share At Price Of
Beginning Distrib- Reinvestment Rights At End At End Shares End of Shares
Year Of Year utions Program Offering Of Year Of Year Owned Year Owned
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140 $ 7.90 $ 9.01 $ 6.00 $ 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(3) .266 0.138(2) 2.524 10.40 26.25 11.125 28.08
- --------------------------------------------------------------------------------------------------------------------------------
1994 2.524 1.00 .277 0.155(2) 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(3) .403 -- 3.670 11.95 43.86 11.25 41.29
- --------------------------------------------------------------------------------------------------------------------------------
1997
1st quarter 3.670 0.32 .097 -- 3.767 11.73 44.19 11.75 44.26
2nd quarter 3.767 0.32 .094 -- 3.861 13.31 51.39 12.938 49.95
3rd quarter 3.861 0.35 .099 -- 3.960 14.01 55.48 14.125 55.94
4th quarter 3.960 0.70(3) .212 -- 4.172 13.32 55.57 13.313 55.54
- --------------------------------------------------------------------------------------------------------------------------------
1. Net Asset Value
2. 1992: Rights offering completed in April 1992. One share offered at $10.05 for every 10 shares owned.
1993: Rights offering completed in October 1993. One share offered at $10.41 for every 15 shares owned.
1994: Rights offering completed in September 1994. One share offered at $9.14 for every 15 shares owned.
3. 1993: Includes the $0.18 per share tax credit passed through to shareholders, which was assumed to be reinvested
at the year-end market price of $11.125.
1996: Includes the $0.13 per share tax credit passed through to shareholders, which was assumed to be reinvested
at the year-end market price of $11.25.
1997: Includes the $0.36 per share tax credit passed through to shareholders, which was assumed to be reinvested
at the year-end market price of $13.313.
</TABLE>
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 realized capital gains and pay income tax thereon to the extent
of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.
---------[7]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Why Multi-Management?
EVEN THE BEST MANAGERS HAVE
INCONSISTENT RETURNS
Funds managed by one portfolio management organization, even a top one, tend to
produce inconsistent returns from one period to another. The graph to the right
illustrates this inconsistency by showing the four best performing growth and
income funds in 1990 and tracking their relative performance rankings over the
next several years. The lack of consistency is clear.
The problem is...
[Line Chart Begin]
THE TOP-RANKED FUNDS
FUND 1 FUND 2 FUND 3 FUND 4
1990 1 2 3 4
1991 141 16 52 35
1992 118 136 84 142
1993 122 103 132 118
1994 7 124 97 4
1995 144 35 104 11
1996 144 94 118 47
1997 140 108 60 123
RANKING AMONG 147 GROWTH & INCOME FUNDS
[Line Chart End]
A SINGLE STYLE PRODUCES
INCONSISTENCY
...a professional portfolio manager practices the same specific investment style
through all types of market environments. For example, a growth stock manager
continues to hold growth stocks even when the stock market favors other types of
stocks. Therefore, as the stock market changes, a manager's returns fluctuate
relative to the stock market, as exhibited in this simplified graph.
In order to reduce these fluctuations...
[FLUCTUATION GRAPH]
MANAGER'S STYLE MANAGER'S STYLE
IN FAVOR IN FAVOR
--------------------------------------------------
STOCK MARKET
RETURNS
--------------------------------------------------
MANAGER'S STYLE
OUT OF FAVOR
--------------------------------------------------[symbol arrow]
TIME
COMBINING STYLES THROUGH
MULTI-MANAGEMENT IMPROVES
CONSISTENCY
...more than one portfolio manager, each employing a different style, manages
the fund. This approach is called "Multi-Management" and is practiced in some
form by most institutional investors. This graph shows a simplified example of
Multi-Management using two diametrically different styles of management. Notice
the combined results produce what neither manager can give alone: consistency.
Of course, the investment performance from styles is not as predictable as
shown, so...
[FLUCTUATION GRAPH]
MANAGER A'S MANAGER B'S MANAGER A'S
STYLE IN FAVOR STYLE IN FAVOR STYLE IN FAVOR
------------------------------------------------------------
MULTI-MANAGER RETURNS: (MANAGER A PLUS MANAGER B)
STOCK MARKET RETURNS
------------------------------------------------------------
MANAGER B'S MANAGER B'S MANAGER A'S
STYLE OUT OF FAVOR STYLE OUT OF FAVOR STYLE OUT OF FAVOR
------------------------------------------------------------[symbol arrow]
TIME
---------[8]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
Constructing the Manager Team
...LAMCO has identified five different styles as the best combination to achieve
All-Star's investment objectives.
Three of the styles, representing 60 percent of All-Star's assets, are Value
styles, which focus on the selection of companies whose ratios of stock price to
estimated value are better than those of similar companies. The other two
styles, representing 40 percent of the assets, are Growth styles, which focus on
the selection of companies whose growth prospects are better than the average
company. Within these broad styles of Value and Growth are the specific styles
shown in the pie chart below.
In addition to producing greater performance consistency, the other objective of
multi-management is to produce above average returns; and to fulfill that
objective LAMCO searches for successful, independent investment management
organizations to hire as Portfolio Managers for All-Star.
Several hundred equity management organizations are both substantial in size and
well-qualified to manage large investment portfolios. In researching and
selecting them, LAMCO focuses on managers who have:
o A constant focus on a particular style of investing.
o A disciplined investment decision-making process.
o A record of success relative to other managers
who practice the same style.
o Continuity among the investment professionals,
so that those who have built the record remain
the managers.
o A well-managed, highly responsive organization.
The pie chart below shows the Portfolio Manager lineup and percentage
allocations to each.
[GRAPHIC PIE CHART]
WESTWOOD MANAGEMENT CORPORATION
Growth / Growth companies selling at reasonable
valuations based on projected earnings growth. 20%
WILKE / THOMPSON CAPITAL
MANAGEMENT, INC.
Growth / High-quality, rapidly
growing companies across the
market capitalization spectrum. 20%
PALLEY-NEEDELMAN ASSET
MANAGEMENT, INC.
Value / Companies with attractive
valuations, sound fundamentals and
above-average dividend income. 20%
OPPENHEIMER CAPITAL
Value / Contrarian holdings
being overlooked and
undervalued by investors. 20%
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Value / Medium- to large-size companies from all market
sectors that are undervalued relative to their projected
growth rates. 20%
As with anything in investments, circumstances change, so...
---------[9]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
Manager Evaluation and, Occasionally, Replacement
...LAMCO conducts continuing evaluation of the Portfolio Managers. The purpose
is to be sure that each is still the best choice for All-Star. Through frequent
meetings with the Portfolio Managers, and through qualitative and quantitative
analyses, each is continually evaluated to assure that:
o It is consistently practicing its Investment Style.
o Its transactions and holdings reflect the Style.
o Its organization and investment process continue to support the Style.
o Its investment performance is competitive when compared with other
managers using a similar Style.
Also, LAMCO is alert to assuring the proficiency of the Portfolio Manager team.
The objective is to be certain that the team remains an optimal combination,
giving All-Star the full benefits of Multi-Management. The procedures include:
o Assuring that All-Star's total portfolio has the proper investment
characteristics.
o Researching new investment managers as possible future Portfolio Managers.
o Making Portfolio Manager changes when necessary. Seven Portfolio Managers
have been replaced from inception in 1986 through 1997.
Further, LAMCO shifts assets among the Portfolio Managers at selected times. As
the previous pie chart indicates, All-Star's assets are allocated among the five
Portfolio Managers to provide the desired style diversification. However, each
day stock market action changes the actual assets under management of the
various managers. Accordingly, from time to time, LAMCO reallocates assets back
to the original allocations in order to preserve the benefits of All-Star's
Multi-Management methodology. This procedure is called rebalancing.
The anatomy of All-Star's Multi-Management structure is visible in its Portfolio
Characteristics on the following page. For reference, it is compared with the
S&P 500 Stock Index.
---------[10]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
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 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 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.
WESTWOOD MANAGEMENT CORPORATION
Growth companies selling at reasonable valuations based on projected earnings
growth.
WILKE / THOMPSON CAPITAL MANAGEMENT, INC.
High-quality, rapidly growing companies across the market capitalization
spectrum.
PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 1997 INVESTMENT STYLE SPECTRUM
(UNAUDITED) VALUE GROWTH
[Color Bar Light to Dark Gold]
<TABLE>
<CAPTION>
Palley- J.P. Oppen- Wilke/ Total S&P
Needelman Morgan heimer Westwood Thompson Fund 500 Index
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Holdings 37 75 28 51 49 212 500
- ------------------------------------------------------------------------------------------------------
Percent in Top 10 34% 23% 49% 31% 35% 13% 19%
- ------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $26 $27 $37 $26 $16 $26 $55
- ------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth 13% 17% 19% 19% 31% 20% 18%
- ------------------------------------------------------------------------------------------------------
Dividend Yield 2.0% 1.5% 1.2% 1.6% 0.3% 1.3% 1.6%
- ------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 17.6x 21.6x 17.0x 20.1x 33.0x 21.8x 21.9x
- ------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 3.9x 5.0x 4.4x 5.1x 7.2x 5.1x 5.5x
- ------------------------------------------------------------------------------------------------------
</TABLE>
---------[11]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Automatic Dividend Reinvestment & Cash Purchase Plan
Under the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), shareholders may elect to participate and have all their Fund
dividends and distributions automatically reinvested by State Street Bank and
Trust Company, as agent for participants in the Plan (the "Plan Agent"), in
additional shares of the Fund. For further information and enrollment forms,
call Investor Assistance at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9
a.m. and 5 p.m. Eastern Time.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee can participate in the Plan only if their brokerage firm, bank or
nominee is able to do so on their behalf. Shareholders participating in the Plan
through a brokerage firm may not be able to transfer their shares to another
brokerage firm and continue to participate in the Plan.
Under the Plan, distributions declared payable in shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional shares valued at the lower of market value or net
asset value per share on the valuation date for the distribution (but not at a
discount of more than 5 percent from market price). Distributions declared
payable only in cash will be reinvested for the accounts of participants in the
Plan in additional shares purchased by the Plan Agent on the open market at
prevailing market prices. Dividends and distributions are subject to taxation,
whether received in cash or in shares.
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in shares of the Fund purchased
on the open market. These voluntary cash payments will be invested on or shortly
after the 15th day of each calendar month, and voluntary payments should be sent
so as to be received by the Plan Agent no later than five business days before
the next investment date. Barring suspension of trading, voluntary cash payments
will be invested within 30 days of receipt. A participant may withdraw a
voluntary cash payment by written notice received by the Plan Agent at least 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There is no charge to participants for reinvesting distributions pursuant
to the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written
notice to the Plan Agent, P.O. Box 8200, Boston, MA 02266-8200. Such termination
will be effective immediately if received not less than 10 days prior to the
record date for a dividend or distribution; otherwise it will be effective on
the first business day after the payment date of such dividend or distribution.
On termination, participants may either have certificates for the Fund shares in
their Plan accounts delivered to them or have the Plan Agent sell such shares in
the open market and deliver the proceeds, less a $2.50 fee plus brokerage
commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
---------[12]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Top 50 Holdings
As of December 31, 1997
<TABLE>
<CAPTION>
RANK MARKET
AS OF VALUE PERCENT OF
RANK 9/30/97 SECURITY NAME ($000) NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 1 Boeing Co. $18,361 1.6%
2 11 International Business Machines Corp. 18,163 1.6
3 25 SBC Communications, Inc. 17,822 1.5
4 7 First Union Corp. 15,698 1.4
5 6 EXEL Limited 14,259 1.2
6 9 Federal Home Loan Mortgage Corp. 14,259 1.2
7 5 May Department Stores Co. 13,804 1.2
8 3 Travelers Group, Inc. 13,738 1.2
9 14 Sprint Corp. 13,400 1.2
10 54 HBO & Co. 13,192 1.1
11 15 Pfizer, Inc. 12,705 1.1
12 10 Citicorp 12,644 1.1
13 43 Mobil Corp 12,301 1.1
14 2 Warner-Lambert Co. 12,251 1.1
15 NEW Fleet Financial Group, Inc. 11,186 1.0
16 75 Texaco, Inc. 11,006 1.0
17 18 Monsanto Co. 10,920 0.9
18 23 Philip Morris Companies, Inc. 10,834 0.9
19 49 Providian Financial Corp. 10,700 0.9
20 19 AFLAC, Inc. 10,225 0.9
21 16 Progressive Corp. 10,189 0.9
22 27 Duke Energy Corp. 9,932 0.9
23 41 AMR Corp. 9,647 0.8
24 28 General Electric Co. 9,539 0.8
25 32 Morgan Stanley, Dean Witter, Discover & Co. 9,460 0.8
26 37 Fiserv, Inc. 9,457 0.8
27 17 Anheuser Busch, Inc. 9,354 0.8
28 35 Aon Corp. 9,126 0.8
29 36 Transamerica Corp. 9,053 0.8
30 145 Ahmanson H.F. & Co. 9,050 0.8
31 61 Automatic Data Processing, Inc. 8,844 0.8
32 44 Arrow Electronics, Inc. 8,758 0.8
33 21 Elan Corp. ADR 8,687 0.8
34 22 Staples, Inc. 8,396 0.7
35 33 U.S. Bancorp 8,373 0.7
36 39 Avon Products, Inc. 8,286 0.7
37 140 Paychex, Inc. 7,953 0.7
38 173 GTE Corp. 7,947 0.7
39 66 Eli Lilly & Co. 7,868 0.7
40 40 Xerox Corp. 7,765 0.7
41 13 Tosco Corp. 7,714 0.7
42 64 WorldCom, Inc. 7,508 0.7
43 24 General Motors Corp. 7,487 0.7
44 51 Union Pacific Corp. 7,455 0.6
45 29 Medtronic, Inc. 7,411 0.6
46 50 Beneficial Corp. 7,357 0.6
47 34 Loews Corp. 7,176 0.6
48 8 Intel Corp. 7,025 0.6
49 4 Nokia Corp. ADR 7,000 0.6
50 53 Schlumberger Ltd. 6,955 0.6
</TABLE>
---------[13]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Major Stock Changes in the Fourth Quarter
The following are the major ($4.0 million or more) stock changes -- both
additions and reductions -- that were made in the Fund's portfolio during the
fourth quarter of 1997, not including changes made in connection with the
substitution of Westwood Management Corporation for Columbus Circle Investors as
a Portfolio Manager effective November 3, 1997.
SHARES
----------------------------------
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 12/31/97
- --------------------------------------------------------------------------------
Aluminum Company of America 85,600 85,600
American Home Products Corp. 80,000 80,000
Bell Atlantic Corp. 63,000 63,000
Campbell Soup Co. 105,000 105,000
Cisco Systems, Inc.* 43,950 106,950
Concord EFS, Inc. 195,400 195,400
Conseco, Inc. 132,100 132,100
Eaton Corp. 67,000 67,000
E.I. du Pont de Nemours & Co. 95,000 95,000
Fleet Financial Group, Inc. 149,400 149,400
International Business Machines Corp. 49,200 173,700
Lockheed Martin Corp. 57,300 57,300
Praxair, Inc. 125,200 125,200
Scientific-Atlanta, Inc. 332,000 332,000
Starwood Lodging Trust 117,700 117,700
Tenet Healthcare Corp. 187,300 187,300
Texaco, Inc. 101,000 202,400
American Stores Co. (256,600) 0
Best Buy, Inc. (200,000) 0
Boeing Co. (150,900) 375,200
Linear Technology Corp. (66,100) 91,700
Tele Communications-TCI Group, Class A (199,918) 0
Warner-Lambert Co. (88,200) 98,800
*Adjusted for stock split
---------[14]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Manager Roundtable
Stock Selection Seen as the Key
to Unlocking Better Returns in 1998;
For Long-Term Success, the Answer
Is in the Question: Think Long Term
UNTIL ASIAN TREMORS JOLTED EQUITY INVESTORS, 1997 WAS ANOTHER '95 OR '96. IS IT
A SEA CHANGE OR A RIPPLE? / The Managers Look at 1998 Prospects, their All-Star
Portfolios and What May Lie Ahead.
After three years of 20 percent-plus performance from the Fund and the S&P 500
Stock Index, many investors are viewing 1998 with far more questions than
answers. After a period of calm, the fourth quarter was one of the most volatile
of the decade as ripples spread from Southeast Asia to equity markets around the
world. Within our own market, investors wonder how much longer a strong economy
and low inflation can peacefully co-exist, and if corporate earnings will
support current market valuations. Recently, the Fund's five Portfolio Managers
wrestled with these questions and others as they looked at 1997, took a look
ahead at what they see for 1998, discussed specific changes in their portfolios
and stepped back for a longer-term view of the market.
The Fund Advisor, Liberty Asset Management Company (LAMCO), serves as the
moderator of the Roundtable. The participating Portfolio Managers and their
Investment Styles are:
J. P. MORGAN INVESTMENT MANAGEMENT INC.
Portfolio Manager / Henry D. Cavanna, Managing Director
Investment Style / Value -- J. P. Morgan Investment Management invests primarily
in the stocks of medium- to large-size companies that are undervalued relative
to their projected growth rates. The firm focuses on individual stock selection,
rather than sector rotation, style/theme investing or market timing. Portfolios
are characterized by above-market earnings and dividend growth, but
price-to-book and price-to-earnings ratios that are below or in line with the
market.
OPPENHEIMER CAPITAL
Portfolio Manager / John G. Lindenthal, Managing Director
Investment Style / Value -- Oppenheimer invests in the stocks of quality
companies with sound business prospects that are considered undervalued because
they are currently disliked or are being overlooked by investors. Research
focuses on cash flow analysis. Purchase candidates exhibit a high return on
invested capital, large undedicated cash flow, and reasonable prices in relation
to book value.
PALLEY-NEEDELMAN ASSET MANAGEMENT, INC.
Portfolio Manager / Roger B. Palley, President
Investment Style / Value -- Palley-Needelman invests in the stocks of companies
which it believes are selling at a substantial discount to their intrinsic value
and where a "catalyst" exists which will lead to a realization by the market of
this true value. Stocks must pay a dividend, and have a market capitalization of
at least $1 billion, and are characterized by below-market price/earnings,
price/cash flow and debt/capital ratios.
WESTWOOD MANAGEMENT CORPORATION
Portfolio Manager / Susan M. Byrne, President and Chief Investment Officer
Investment Style / Growth -- Westwood's investment strategy is growth at a
reasonable price. The firm employs internally generated, bottom-up, fundamental
research and seeks to identify stocks with misperceived growth expectations.
Proprietary income and balance sheet projections are utilized to identify
securities whose typical portfolio characteristics are characterized by higher
return on equity, higher forecasted 12-month growth rates and lower forecasted
price/earnings ratios than the market.
(Moderator's Note: Westwood was retained as a Portfolio Manager late in the
fourth quarter of 1997.)
WILKE/THOMPSON CAPITAL MANAGEMENT, INC.
Portfolio Manager / Mark A. Thompson, Chief Investment Officer
Investment Style / Growth -- Wilke/Thompson concentrates on high quality
sustainable 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.
- --------------------------------------------------------------------------------
The views expressed in this interview represent the managers' views at the time
of the discussion and are subject to change.
- --------------------------------------------------------------------------------
---------[15]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Manager Roundtable
LAMCO: We'll take a look back at 1997 -- but before we do, the subject likely to
be uppermost in shareholders' minds is your outlook for 1998. From the vantage
point of your investment style, what will you be doing to achieve your
investment objectives in 1998? John Lindenthal, start us off with Oppenheimer's
view, please.
LINDENTHAL (OPPENHEIMER -- VALUE): Our style of investing can be best described
as a long-term holder of superior businesses. We stress a high return on
invested capital, a high level of cash flow generation throughout the economic
cycle and managements that redeploy cash flow for the benefit of the
shareholder. Our style or philosophy does not change as a result of a market or
economic outlook. Well positioned companies create value for the shareholder
over extremely long periods of time. We want to own companies that will be
prospering 20 years from now.
LAMCO: Henry Cavanna, what are your thoughts at J. P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): In 1998 we will continue to maintain a sector
neutral approach with emphasis on bottom-up stock selection based on internal
fundamental analysis. It is our expectation that owning the most undervalued
stocks will prove to be the most rewarding strategy this year. Our style leads
us to have holdings in all major market sectors, and to add value primarily from
owning the most attractive stocks within each sector.
LAMCO: Roger Palley, what will Palley-Needelman be stressing in 1998?
PALLEY (PALLEY-NEEDELMAN -- VALUE): Rarely has it been so easy to make money in
the stock market as it has been over the past three years. Now, investment
managers will really have to earn their performance. The key to success in '98
most likely will be stock picking -- as opposed to "indexing" which has recently
been so successful. Had you owned the largest capitalized stocks in the Barra
Value Index or the S&P 500, you would have beaten all markets soundly.
Similarly, had you been overweighted in financials and telecommunications you
would have had spectacular results. It will not be that easy again. In '98,
picking the right stocks in the right sectors should be the key to successful
investing. Adhering to value investing rather than chasing the high
price/earnings issues, like the Cokes, GEs and Microsofts, may be the secret to
the year ahead -- especially if Asian problems spill over and lead to a slower
U.S. economy than is anticipated at present.
As the market becomes more uncertain about economic conditions, there will
be a flight to quality. This continues to favor larger capitalization stocks.
However, unlike the past few years, the tide will not lift all boats. Therefore,
more so than in years past, successful stock picking should be the key to good
performance.
LAMCO: Susan Byrne, welcome. Shareholders have not had the opportunity to meet
you in one of our quarterly report Manager Interviews, but we'll remedy that in
the 1998 first quarter report. Still, Westwood has been managing equities since
1983, so you're certainly well qualified to share your thoughts about the year
ahead.
BYRNE (WESTWOOD -- GROWTH): From our vantage point, stock picking will be key to
good returns. While profit growth will likely be lower than it was in 1997, we
still expect it to be positive. The expected slowdown in the overall rate of
profit growth will cause investors to carefully focus on stock selection and
individual company growth prospects. Telecommunications and pharmaceuticals
continue to be fertile ground for stock selection in the growth area.
[callout]
'From our vantage point, stock picking will be key to good returns (in 1998).
While profit growth will likely be lower than it was in 1997, we still expect it
to be positive. The expected slowdown in the overall rate of profit growth will
cause investors to carefully focus on stock selection and individual company
growth prospects.'
Susan Byrne / Westwood
[end callout]
LAMCO: Finally, as we look ahead, Mark Thompson, what's your perspective?
Thompson (Wilke/Thompson -- Growth): We agree -- stock picking will become of
increased importance in 1998. Certain factors are coming together which will
make it more difficult for many companies in the broad indices to post strong
earnings gains in 1998. Increased spending to
---------[16]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Manager Roundtable
correct the so-called Y2K (year 2000) problem in computer systems will result in
rising costs for many companies. A shortage of trained workers in various fields
is putting upward pressure on wage rates. At the same time, continued low
inflation and increased global competition is limiting companies' ability to
pass through these rising costs in the form of higher prices. The result:
declining profit margins, which, when combined with slower economic activity,
make earnings growth increasingly more difficult for many companies.
Wilke/Thompson seeks to invest in companies that have the ability to grow sales
and earnings at an above average rate in spite of the economic environment. We
believe we are entering a period when growth will be more difficult for the
average company, and the consistent growth companies will be recognized. In this
type of environment, fundamental research on individual companies is rewarded
and stock picking will be key to success.
[callout]
'We believe we are entering a period when growth will be more difficult for the
average company, and the consistent growth companies will be recognized. In this
type of environment, fundamental research on individual companies is rewarded
and stock picking will be key to success.'
Mark Thompson / Wilke/Thompson
[end callout]
LAMCO: Looking back at 1997, how would you summarize -- in a few words -- the
year's "story?" Let's stay with the growth managers. Mark Thompson, lead off,
please.
THOMPSON (WILKE/THOMPSON -- GROWTH): Three themes can best describe 1997. Large
capitalization stocks outperformed their smaller counterparts. Likewise, value
stocks outpaced growth stocks across all capitalization ranges using the Russell
indices. And, finally, the S&P 500 continued its impressive run of annual
returns by posting its third consecutive year of strong performance.
BYRNE (WESTWOOD -- GROWTH): The dramatic shift in inflation expectations by
investors was a driving force in market performance in 1997. Fears of higher
inflation dominated the market for the first part of the year. However, as we
neared the end of the year, investors were clearly more comfortable with the
perception that lower inflation -- and, perhaps, disinflation -- would prevail.
This perception of lower inflation contributed to stronger performance in
interest rate sensitive stocks, and they replaced the technology related groups
that for the past few years had provided the majority of market leadership.
LAMCO: Henry Cavanna, how would you describe it?
CAVANNA (J.P. MORGAN -- VALUE): Nineteen ninety-seven was highly unusual in that
the economy, corporate profits and the stock market were very strong, but
inflation and long-term interest rates remained remarkably benign. The other
remarkable thing about the market was its lack of breadth, the continuation of a
three-year trend of narrow leadership in the largest companies along with
punishing corrections in companies with short-term profit disappointments.
LAMCO: John Lindenthal, how would you sum up the year?
LINDENTHAL (OPPENHEIMER -- VALUE): The U.S. equity market was strong in 1997
because the economy remained on course with moderate growth, low declining
inflation, generally falling interest rates and positive liquidity flows.
Corporate profits were better than expected as a rule.
LAMCO: Roger Palley, how would you recap 1997?
PALLEY (PALLEY-NEEDELMAN -- VALUE): Deflation replaced inflation as the most
feared word for investors in '97. Low inflation, moderate growth and declining
interest rates spurred the market to historic levels, again. Investors endured
tremendous volatility with record volume and witnessed wide return variances in
similar industries ... e.g., in the fourth quarter computer systems gained
24.8 percent while semiconductors declined 38.2 percent.
LAMCO: Now, perhaps, we could look a little more in depth at 1997 in the context
of your style, with emphasis on the fourth quarter. Roger Palley, why don't you
lead off?
PALLEY (PALLEY-NEEDELMAN -- VALUE): The year was reminiscent of the
"nifty-fifty" era of the 1960s. Those stocks with the largest capitalizations in
the S&P 500 as well as technology issues continued to attract the lion's share
of investment funds as "indexing" became more and more
---------[17]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Manager Roundtable
popular. The valuations placed on these issues became far too lofty for true
conservative value managers, like ourselves, to own and still be faithful to
their style. The year, particularly the fourth quarter, was also highlighted by
financials and telephone utilities which posted tremendous returns. The Barra
Value Index is heavily weighted in financials and utilities and consequently
outperformed many indices and most managers. As a pure value manager priding
ourselves on being diversified, this kind of extreme sector concentration made
1997 a difficult environment.
LAMCO: Henry Cavanna, analyze the year as J. P. Morgan views it, please.
CAVANNA (J.P. MORGAN -- VALUE): The market narrowed dramatically in the fourth
quarter with leadership concentrated in the largest, most stable companies. The
uncertainty created by the crisis in Asia resulted in a significant flight to
quality. We follow a valuation discipline that prevents us from owning companies
simply based on momentum and greater certainty of earnings unless we are able to
make a longer term valuation case for the holding. This discipline worked
against us, especially in the fourth quarter. We also were hurt by owning a
number of companies whose short-term earnings did not meet expectations. The
combination of under-owning the largest, most stable companies and owning a
number of companies with short-term earnings that fell short led to
disappointing relative performance in the fourth quarter.
[callout]
'Nineteen ninety-seven was highly unusual in that the economy, corporate profits
and the stock market were very strong, but inflation and long-term interest
rates remained remarkably benign. The other remarkable thing about the market
was its lack of breadth, the continuation of a three-year trend of narrow
leadership in the largest companies...'
Henry Cavanna /
J. P. Morgan
[end callout]
LAMCO: Give us Oppenheimer's thoughts, please, John Lindenthal.
LINDENTHAL (OPPENHEIMER -- VALUE): Our results for the year were aided by the
strong performance of the financial stocks in our portfolio, a position we have
held since our inception as a manager in early 1990. The more notable stocks in
this category included: Travelers (diversified financial services, +80 percent),
EXEL Ltd. (Bermuda-based insurer specializing in low frequency, high severity
business risk, +72 percent), Progressive Corp. (nonstandard auto insurer, +78
percent), and Federal Home Loan Mortgage (federally chartered corporation which
provides supplemental liquidity to the mortgage market, +53 percent). In the
fourth quarter, financial markets worldwide were buffeted by the impact of the
Asian financial crisis. Equity prices in some Asian nations fell precipitously
and the U.S. equity market was extremely volatile. We seek to invest in
superior, sustainable companies no matter where they are headquartered.
LAMCO: Share your thoughts on this question, please, Mark Thompson.
THOMPSON (WILKE/THOMPSON -- GROWTH): The past year was a very rewarding yet
complex one for investors, as it began with questions about the direction of
interest rates and concluded with uncertainty about the impact of the Asian
currency crisis on the domestic economy. Value stocks of all sizes and large cap
growth stocks generally were in favor, while small and mid-cap growth stocks
were not.
The market generally widened out in the last nine months of the year. By
the third quarter, many stock market watchers thought the market was actually
starting to favor smaller and mid-cap growth stocks. We tried to caution our
clients that the market was widening but that large cap leadership had been in
place for years and a true change could take quite a while. The financial
difficulties in Asia have caused the larger, multinational stocks to be in
relative favor as a way of deploying dollars in the U.S. Equity markets. Though
this is not surprising, we believe the Asian financial difficulties are likely
to cause a slowing in economic activity. Large, multinational companies are most
exposed to this impact, making it even more difficult for them to post the kind
of strong earnings growth they achieved over the last few years.
In the fourth quarter, many companies with exposure to Asia felt the impact
of the recent events in that part of the world. Even companies not directly
exposed to this area, such as personal computer distributors, experienced
declines in their stock prices. While Wilke/Thompson
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Manager Roundtable
owns few companies with direct exposure to the Asian markets, the impact was
felt by companies whose business is tangentially related to this region. In
particular, our distribution and electronics/semiconductor sectors were
particularly weak in the fourth quarter. Although the portfolio remains
fundamentally sound, it is not immune to such broader market impacts.
LAMCO: Actual events have a way of puncturing the "truths" served up by
conventional wisdom. For example, few thought 1997 could be as strong as it was
after great years in 1995 and 1996 -- yet it became a history-maker. What needs
to happen to give us another good year in 1998? Henry Cavanna, what are your
thoughts?
CAVANNA (J.P. MORGAN -- VALUE): In order for 1998 to be a good year, it will be
important for the U.S. economy to be not much affected by the weakness in Asia.
We are entering the year with good economic momentum and very low inflation.
With real GDP growth moderating to about 2.7 percent, we should have a year in
which profits improve about 5 percent. Moderate economic and profit growth with
low inflation may give us a satisfactory year in '98.
PALLEY (PALLEY-NEEDELMAN -- VALUE): What needs to happen in order for the market
to keep up its torrid pace is simply the perception of a robust domestic
economy. Already, the present economy is shaping up very much like last year.
With Alan Greenspan's firm grip on the rudder, the economy will benefit from low
inflation, moderate growth, high employment and high consumer confidence.
Earnings thrive in this environment. As long as confidence remains high and
Americans continue to increase savings in the form of retirement investing, the
market will remain strong. The Asian effect will dampen earnings growth -- the
wild card being to what degree?
[callout]
'With Alan Greenspan's firm grip on the rudder, the economy will benefit from
low inflation, moderate growth, high employment and high consumer confidence.
Earnings thrive in this environment. As long as confidence remains high and
Americans continue to increase savings in the form of retirement investing, the
market will remain strong.'
Roger Palley / Palley-Needelman
[end callout]
LINDENTHAL (OPPENHEIMER -- VALUE): For 1998 to be a good year, we need more of
what happened in 1997. Inflation must remain low so the Federal Reserve can
continue to be neutral. Also, the Asian problem must be addressed in a positive
manner that keeps it from spreading to the U.S. and Europe. Money growth and
inflation have remained fairly low in both the U.S. and Europe, and we expect
these low rates of growth to continue.
LAMCO: What are the growth managers' views?
BYRNE (WESTWOOD -- GROWTH): To have another good year in 1998, low inflation,
low interest rates and moderate profit growth -- that is, the "Goldilocks"
combination -- is needed. Countries in Southeast Asia and the International
Monetary Fund (IMF) are working hard on a vaccination for the "Asian Flu." These
efforts must be successful for the continued profit growth that is essential to
strong equity market performance.
THOMPSON (WILKE/THOMPSON -- GROWTH): In order for 1998 to continue the strong
performance of the last three years, the same variables that propelled the
markets must remain intact. Specifically, the rate of inflation must remain
relatively low. Accordingly, interest rates must remain stable or decline
modestly. The domestic economy must continue its steady growth without driving
interest rates or inflation upwards. The continuance of investment inflows into
the stock market is also needed in order that demand exceeds supply. The wild
card in the equation will be the foreign markets. Specifically, it is unclear to
what extent the difficulties experienced in Southeast Asia will impact our
domestic economy and stock market.
LAMCO: What may happen to send the bull running for cover?
PALLEY (PALLEY-NEEDELMAN -- VALUE): Anything disrupting our current low
inflation, moderate growth and low interest rates would send this stock market
downward. The economic problems in Asia may not alter the low inflation/low
interest rate environment, but it will have an effect on the growth of our
economy by reducing exports. Disruption of Middle Eastern oil imports would rock
the current low inflation environment and, in turn, raise interest
---------[19]---------
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Manager Roundtable
rates. But currently, the only visible threat to this market remains Asia.
CAVANNA (J.P. MORGAN -- VALUE): More uncertainty and more profit disappointment
should have a negative impact on the market. U.S. company profit margins may be
under increasing pressure as the year unfolds and this will provide tangible
evidence that the "Goldilocks" economy is running out of steam. This will result
in more volatility and ultimately to a modest correction back to more normal
price/earnings multiples.
THOMPSON (WILKE/THOMPSON -- GROWTH): The most readily apparent catalyst that
could disturb the present bull market is the crisis in Southeast Asia. If the
troubles that those economies are experiencing spill over into our domestic
economy, the stock market could react harshly. In general, any weaker economic
activity will adversely impact the marketplace. Decelerating corporate profits
would serve to make investors question the price that they pay for stocks.
LINDENTHAL (OPPENHEIMER -- VALUE): If inflation were to pick up and, therefore,
the Federal Reserve were to decide to tighten credit, then the market would turn
very difficult.
BYRNE (WESTWOOD -- GROWTH): Anything disrupting the Golilocks scenario described
earlier would send the bull running for cover. We expect a slowdown in corporate
profits, but a sharp deceleration with flat to down earnings growth would be a
negative for the market. Southeast Asia will be an overhang on the market as
long as earnings slowdowns are attributed to disruptions in orders from that
part of the world.
LAMCO: Speaking of the way events can puncture conventional wisdom, what's your
own favorite bit of "unconventional wisdom?"
LINDENTHAL (OPPENHEIMER -- VALUE): Conventional wisdom is that the economy and
the equity market are closely related. The reality is that the market is a
function of many inputs, but primarily it is driven by liquidity. In other
words, the flow of funds in our financial system is more important than the
overall state of the economy. When we have excess liquidity -- that is, a
greater supply of funds rather than demand for funds -- financial assets
benefit.
[callout]
'Conventional wisdom is that the economy and the equity market are closely
related. The market is...driven by liquidity. In other words, the flow of funds
in our financial system is more important than the overall state of the economy.
When we have excess liquidity -- that is, a greater supply of funds rather than
demand for funds -- financial assets benefit.'
John Lindenthal / Oppenheimer
[end callout]
CAVANNA (J.P. MORGAN -- VALUE): It is possible, although not likely, that
deflation may become more than a discussion point and create an atmosphere where
the Federal Reserve would lower short-term interest rates to restimulate the
economy as evidence mounts that world economic growth is faltering.
PALLEY (PALLEY-NEEDELMAN -- VALUE): Our contrarian view is that the Asian crisis
is not as bad as it appears. The strength of our economy should overshadow any
ill-effects of this problem. With so many U.S.-based companies producing in
Southeast Asia, production costs may decline, offsetting the effects of the lost
revenue caused by a slowdown in exports. New capital around the world will flow
to Asian markets to build production facilities as the costs of production
continue to decline in those regions. Barring any new trade barriers, Asia could
very well produce itself out from under the current problems.
BYRNE (WESTWOOD -- GROWTH): Unconventional wisdom in the portfolio has been best
reflected in our real estate investment trust (REIT) holdings for the past year.
We continue to be invested in the group, as real estate continues to move from
private to public markets. Ready access to capital markets will allow REITs to
continue strategic acquisitions, which should foster further earnings surprises
for the group in 1998. We expect to see an increase in capital spending on
existing properties, which will lead to higher rents and occupancy in selected
markets.
THOMPSON (WILKE/THOMPSON -- GROWTH): The bit of unconventional wisdom that I
would offer is that the market will advance in 1998, yet corporate earnings will
be
---------[20]---------
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Manager Roundtable
disappointing. A modest slowdown in economic growth will make it more difficult
for companies to continue to post the same level of earnings growth. However,
lower interest rates and the perceived safety that the U.S. market offers will
still serve to advance the market.
LAMCO: Turning to portfolio specifics, please discuss two or three recent
additions to the Fund's portfolio. What were they and why were they purchased?
What are two or three stocks that you sold recently, and why? Can you start us
off, John Lindenthal?
Lindenthal (Oppenheimer -- Value): One of our more recent buys was Caterpillar.
CAT has a worldwide franchise selling high quality earth moving and construction
equipment. Its plant is state of the art, its distribution is unparalleled and
its financial performance has improved dramatically. CAT is using the excess
cash it has generated to buy in stock and make acquisitions that bolster its
existing product lines.
We also added to our position in Wells Fargo, a leading bank in the Western
United States. Wells is on the brink of realizing efficiencies from its merger
with First Interstate following some integration difficulties. They have been
consolidating overlapping branches, replacing many free standing branches with
small "electronic" ones in supermarkets. Wells now has over 20,000 customers
doing business with them over the Internet, more than any other bank. We expect
an average annual growth in net income of 12 percent during the next four years.
Furthermore, Wells has been purchasing approximately 6 percent of its shares
annually. Through this combination of earnings growth and share reduction, we
expect the stock's value to compound at a high-teens rate. Thus, we believe the
intrinsic value of Wells Fargo shares will increase at a faster rate than most
bank stocks, yet it sells at a lower price-to-cash earnings ratio than the
industry average.
[callout]
'If 1998 turns out to be a difficult year for the U.S. equity market,
opportunities will be presented to our managers to purchase solid businesses at
even better prices. Volatility and group rotation create attractive entry points
for managers...'
John Lindenthal / Oppenheimer
[end callout]
LAMCO: Henry Cavanna, can you discuss the portfolio decisions that were made by
J. P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): In the fourth quarter, we established a new
position in Motorola. The company has been in the process of restructuring with
new leadership in all major lines of business and a new product cycle unfolding,
especially in the critical cellular phone business. We believe there is
significant pent up demand globally for cellular products, particularly in the
U.S. as price per minutes of use continues to fall and in Europe as carriers
expand capacity. While weakness in Asia is of some concern, we expect any
shortfall to be more than compensated by strength in the U.S. and Europe. The
stock has been flat for three years and was in our first quintile of the
technology sector. We also invested in Federal National Mortgage Association
(Fannie Mae), which is the country's largest provider of residential mortgages.
The market was concerned about a trend of lower spreads and volumes, but Fannie
Mae looked like a good value with earnings growth of 12 percent over the next
several years, with the potential of actually benefiting from lower interest
rates producing a moderate surge in refinancing activity.
During the quarter, we sold our holdings in First Chicago NBD Corp.,
principally on a price basis. The company is well managed and earnings have
grown nicely, but the stock had done well and became a sell candidate. Takeover
speculation, which turned out to be unfounded, also helped create the sell
opportunity. We also reduced our holding in Boeing at a time when production
delays caused us to lower earnings expectations over the next year. While Boeing
is expected to bring production back on track, we are also worried about the
potential for some Asian order cancellations. We retained some of the holding
due to a more positive longer term view and a good relative valuation within its
sector.
LAMCO: Bring us up to date with Palley-Needelman's portfolio, please, Roger
Palley.
PALLEY (PALLEY-NEEDELMAN -- VALUE): American Home Products (AHP) was added to
our portfolio in the fourth quarter when the stock's price was beaten down. It
was suggested there may be a correlation between defective heart valves and the
use of AHP's diet drugs Pondimin and
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Manager Roundtable
Redux. AHP immediately pulled both drugs off the market. AHP never recommended
the products be used in the combination suspected of causing the heart defects.
Before the controversy arose, AHP sent letters urging doctors prescribing these
diet drugs to adhere to the label and restrict promotion of Redux to the
clinically obese.
The financial impact of recalling the drugs will result in a few cents per
share reduction to earnings. From all appearances, AHP management has not
misrepresented the drugs. This management group is experienced in similar
matters and appears to have done everything to prevent further damage to
patients. We believe the potential liabilities are not only sufficiently covered
but materially lower than current fears reflected in the stock's price. All this
presented an attractive buying opportunity.
We also acquired a position in Fleet Financial Group (FLT). This
Northeastern bank became one of the nation's largest commercial lenders when, in
1996, it acquired market competitors Shawmut National and NatWest Bank. We view
these additions as less important than the '97 acquisitions made in their
non-banking lines as key to success in the years ahead.
In '97, management focused on a multi-year strategic plan to become a
full-service financial institution by operating "non-banking" subsidiaries. FLT
made several sizable acquisitions enhancing their existing divisions. These
included Columbia Management Company, a Portland, Oregon based mutual fund
manager with $22 billion under management; Quick & Reilly Group, the nation's
third largest discount brokerage firm with over 1 million retail brokerage
accounts and 115 branch offices; and Advanta Corporation's consumer credit card
operations consisting of 6 million accounts and $10 billion in receivables. This
makes Fleet the ninth largest credit card company in America.
Recent sales include American Stores. This sale demonstrated both aspects
of why and when we decide to sell a holding. Through the first week in November,
the stock had outperformed the S&P 500 by over 2 percent per year over the 2-1\2
years we held the stock. This is impressive given the highly defensive nature of
its business (retail grocery stores and drug stores). At $26.50 a share, the
stock appeared fully valued, reached our price target and we sold our position.
We also sold Edison International. For several years, utilities
underperformed the market averages. In early 1997, we found value in this sector
and added two electric utilities to the Fund's portfolio. One was Edison
International, Southern California's electric utility. Though the overall
outlook for this industry remained murky, dramatic changes were in the works at
Edison. The management of this company took the lead in announcing that it would
no longer be a producer of energy. Rather, Edison would become primarily a
distributor of low cost energy acquired from producers in other regions of the
country.
The market reacted favorably to this news and returned over 35 percent on
the Fund's investment in less than a year's time. At that level, the stock was
near our price target, appeared fully valued relative to its peers and, thus, we
sold half of our position and continue to sell the stock as a source of funds
for new stocks.
LAMCO: Mark Thompson, what portfolio decisions has Wilke/Thompson made?
THOMPSON (WILKE/THOMPSON -- GROWTH): Recent purchases include JLK Direct
Distribution. JLK is the nation's leading direct distributor of metalworking
products. The company offers more than 100,000 stock keeping units (SKUs) and
serves small- to medium-sized businesses through a network of local branches
staffed by direct salespeople. Through its strategy of superior customer service
and value-added to the distribution channel, JLK becomes an important business
partner to its customers and differentiates itself from its competitors. The
market JLK serves is highly fragmented with numerous small competitors. JLK is
using this as an opportunity to consolidate the business through strategic
acquisitions which provide the company with additional growth vehicles.
[callout]
'The market generally widened out in the last nine months of the year. By the
third quarter, many stock market watchers thought the market was actually
starting to favor smaller and mid-cap growth stocks. We tried to caution our
clients that the market was widening but that large cap leadership had been in
place for years and a true change could take quite a while.'
Mark Thompson / Wilke/Thompson
[end callout]
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Manager Roundtable
HBO & Company is another acquisition. HBO delivers enterprisewide patient
care, clinical, financial and strategic management software solutions for
healthcare providers, payers and integrated healthcare delivery systems. The
company's products and services can help improve the quality of healthcare
delivery while containing costs. Its products help keep track of patient records
and address the increasing information needs of employers, insurance firms and
government agencies. HBO has long been established as the premiere healthcare
information systems vendor.
Among recent sales, we sold Micro Warehouse. Micro Warehouse is a specialty
catalog retailer and direct marketer of brand name personal computers, computer
software and other networking products. After the company announced the
resignation of its CEO, Chip Lacy, we eliminated the company from the portfolio.
Although we do not always sell a company based on a change of management, Chip
was central to the Micro Warehouse strategy that we envisioned.
We also sold the specialty retailer of fine jewelry, Tiffany & Co. Although
the company has done an admirable job at managing its business, we eliminated it
from the portfolio over concerns regarding its Far East exposure, particularly
Japan. Tiffany has over 25 percent of its sales and 40 percent of its profits
directly exposed to the Japanese market. The company has not shown any signs of
a slowdown in sales; however, we anticipate with the problems in this part of
the world that sales are likely to be negatively impacted eventually.
LAMCO: Susan Byrne, what areas of the portfolio look attractive as we head into
1998?
BYRNE (WESTWOOD -- GROWTH): The REIT segment of the market offers several unique
growth opportunities. Overall, conditions are strong for real estate. The U.S.
real estate market is in its fourth year of recovery, as a strong economy keeps
pushing rent and occupancy rates higher. Office vacancy rates are at their
lowest point since 1986 and landlords are raising rents faster than anticipated.
In this environment, we look for REITs that have strong growth prospects and
innovative management teams.
Crescent Real Estate Equities has been and should continue to be an
outstanding growth story, with the added benefit of attractive yields. Crescent
has done an excellent job of putting together a portfolio of premier properties
at a significant discount to replacement cost. As Crescent becomes the dominant
landlord of top tier office markets in the southwest, the economies of scale
will become increasingly apparent, resulting in further earnings surprises. In
fact, Crescent recently announced that fourth quarter 1997 earnings would be in
the range of 60-63 cents a share. That's 60 percent higher than last year and
above Wall Street's expectations of approximately 55 cents.
[callout]
'Corporate America had lost the perception of world leadership prior to the late
1990s... (Now) relentless cost reduction and investment in technology in the 90s
should foster market leadership at the turn to the year 2000. Competitive
advantage as low cost producers along with being the leader in technology will
continue to support U.S. dominance in business and industry.'
Susan Byrne / Westwood
[end callout]
LAMCO: Let's step back and take a long look at the market. Whatever 1998 brings,
what, in your opinion, are the most compelling arguments for individual
investors to remain committed to the U.S. equity market? John Lindenthal, start
us off on this final question, please.
LINDENTHAL (OPPENHEIMER -- VALUE): If 1998 turns out to be a difficult year for
the U.S. equity market, opportunities will be presented to our managers to
purchase solid businesses at even better prices. Volatility and group rotation
create attractive entry points for managers to build a portfolio of companies
whose aggregate earnings march upward over the years, and so also will the
portfolio's market value.
LAMCO: Roger Palley, what's the thinking at Palley-Needelman?
PALLEY (PALLEY-NEEDELMAN -- VALUE): The current 15-year bull market certainly is
unprecedented. Few market analysts anticipated the terrific year we have just
completed. It is important to recall, however, that this bullish period followed
an unusually long period when stock market returns were well below average. The
market whispers of deflation, recession and bear markets will likely temper the
lofty return expectations new investors have come to expect. However, history is
on our side and it
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Manager Roundtable
tells us that the stock market remains the best long-term investment. There are
some important facts to keep in mind if you are to be a long-term -- in other
words, successful -- investor. First and foremost, all the ingredients are in
place to sustain corporate earnings growth in the years ahead: low inflation,
moderate growth with declining interest rates and full employment. An entire
generation of investors are focused on saving and investing, a trend that will
not go away anytime soon. Corporate America continues to be the global leader in
technology innovations.
No doubt, the multiple the market assigns to corporate earnings will
fluctuate from year to year. And no doubt, we are at the high end of that range.
However, history again tells us that it is impossible to successfully time the
market. Equity investors with a long-term time horizon and a buy-and-hold
discipline have consistently achieved superior rates of return over any other
investment option.
The chance of a severe decline in the market is unlikely. Only once since
the 1930's depression has the market declined more than twenty-five percent in a
year's time. Contrast that to the S&P 500's 125 percent gain in just three
years. Over the past 71 years the market has averaged better than 10 percent
gains per year. Barring any unforeseen shocks to our economy, we anticipate
long-term market returns to look very much like they have in the past -- better
than bonds and a bit better than 10 percent per year.
[callout]
'...history is on our side and it tells us that the stock market remains the
best long-term investment. There are some important facts to keep in mind if
you are to be a long-term -- in other words, successful investor. First and
foremost, all the ingredients are in place to sustain corporate earnings growth
in the years ahead: low inflation, moderate growth with declining interest
rates and full employment.'
Roger Palley / Palley
Needelman
[end callout]
LAMCO: Mark Thompson, put on the binoculars for us, please.
THOMPSON (WILKE/THOMPSON -- GROWTH): The United States offers the most
attractive equity environment in the world. The domestic economy should remain
strong for 1998. Inflation has shown few signs that suggest that it will be a
concern. Interest rates appear to be holding steady as opposed to rising which
also bodes well for the equity market. Finally, the U.S. equity market has
exhibited relative stability over long periods of time as compared to several
other foreign markets.
LAMCO: Susan Byrne, your thoughts?
BYRNE (WESTWOOD -- GROWTH): Corporate America had lost the perception of world
leadership prior to the late 1990s. Corporate leverage and government budget
concerns dominated discussions. Today, leverage is less of a threat, balance
sheets are in order, funds flow to government debt as a safe haven and
relentless cost reduction and investment in technology in the 90s should foster
market leadership at the turn to the year 2000. Competitive advantage as low
cost producers along with being the leader in technology will continue to
support U.S. dominance in business and industry.
LAMCO: Henry Cavanna, perhaps you can wrap up the discussion with the case as
you see it.
CAVANNA (J.P. MORGAN -- VALUE): While the U.S. equity market may have gotten a
bit ahead of itself, there are good reasons to be positive on a longer term
basis. These reasons start with being invested in the strongest economy in the
world and in a market that has more world-class companies than any other. The
U.S. is the world technology leader, which gives us an enormous competitive
advantage as we enter the next century.
LAMCO: Thank you all very much.
---------[24]---------
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Schedule of Investments
As of December 31, 1997
COMMON STOCKS (101.1%) SHARES MARKET VALUE
================================================================================
AEROSPACE (2.1%)
Boeing Co. 375,200 $ 18,361,350
Lockheed Martin Corp. 57,300 5,644,050
------------
24,005,400
------------
AUTO, TIRES & ACCESSORIES (1.8%)
Chrysler Corp. 88,000 3,096,500
General Motors Corp. 123,500 7,487,188
Goodyear Tire & Rubber Co. 36,800 2,341,400
Lear Corp. (a) 66,700 3,168,250
TRW, Inc. 81,300 4,339,388
------------
20,432,726
------------
BANKS (6.3%)
ABN AMRO Holding NV ADR 136,200 2,655,900
Ahmanson H.F. & Co. 135,200 9,049,950
Banc One Corp. 16,925 919,239
Chase Manhattan Corp. 26,600 2,912,700
Citicorp 100,000 12,643,750
First Hawaiian, Inc. 26,900 1,089,450
First Union Corp. 306,300 15,697,875
Fleet Financial Group, Inc. 149,400 11,186,325
U.S. Bancorp 74,800 8,372,925
Washington Mutual, Inc. 37,400 2,386,588
Wells Fargo & Co. 17,000 5,770,438
------------
72,685,140
------------
BUSINESS SERVICES (6.5%)
Acxiom Corp. (a) 191,600 3,688,300
America Online, Inc. (a) 75,100 6,697,981
Autodesk, Inc. 67,400 2,476,950
Automatic Data Processing, Inc. 144,100 8,844,137
Cabletron Systems, Inc. (a) 140,800 2,112,000
Catalina Marketing Corp. (a) 84,500 3,908,125
Cintas Corp. 155,600 6,068,400
Concord EFS, Inc. (a) 195,400 4,860,575
Fiserv, Inc. (a) 192,500 9,456,562
J.D. Edwards & Co. (a) 72,400 2,135,800
Oracle Corp. (a) 201,650 4,499,316
Robert Half International, Inc. (a) 148,600 5,944,000
Sitel Corp. (a) 519,700 4,742,263
See Notes to Schedule of Investments.
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Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
BUSINESS SERVICES (CONT.)
Sterling Commerce,Inc. (a) 85,800 $ 3,297,937
Sterling Software, Inc. (a) 97,500 3,997,500
Sykes Enterprises, Inc. (a) 120,900 2,357,550
------------
75,087,396
------------
CHEMICALS (2.9%)
Albemarle Corp. 57,600 1,375,200
E.I. du Pont de Nemours & Co. 95,000 5,705,937
Monsanto Co. 260,000 10,920,000
Morton International, Inc. 176,900 6,080,937
Praxair, Inc. 125,200 5,634,000
Union Carbide Corp. 95,700 4,109,119
------------
33,825,193
------------
COMPUTER & BUSINESS EQUIPMENT (6.8%)
Cisco Systems, Inc. (a) 106,950 5,962,462
EMC Corp. (a) 172,000 4,719,250
HBO & Co. 275,200 13,192,400
Ingram Micro, Inc., Class A (a) 173,400 5,050,275
Intel Corp. 100,000 7,025,000
International Business Machines Corp. 173,700 18,162,506
Microsoft Corp. (a) 35,100 4,536,675
Saville Systems Ireland PLC ADR (a) 70,700 2,934,050
Sun Microsystems, Inc. (a) 103,000 4,107,125
Tech Data Corp. (a) 121,600 4,727,200
Xerox Corp. 105,200 7,765,075
------------
78,182,018
------------
CONSTRUCTION (0.9%)
Foster Wheeler Corp. 153,800 4,162,213
Masco Corp. 125,000 6,359,375
------------
10,521,588
------------
CONSUMER PRODUCTS (2.1%)
Electronic Arts, Inc.(a) 61,700 2,333,031
Philip Morris Companies, Inc. 239,100 10,834,219
Procter & Gamble Co. 44,000 3,511,750
Ralston-Ralston Purina Group 46,700 4,340,181
Unilever NV ADR 43,800 2,734,763
------------
23,753,944
------------
See Notes to Schedule of Investments.
---------[26]---------
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Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
COSMETICS & TOILETRIES (0.9%)
Avon Products, Inc. 135,000 $ 8,285,625
Gillette Co. 23,300 2,340,194
------------
10,625,819
------------
DIVERSIFIED (3.1%)
Allied Signal, Inc. 83,900 3,261,613
Cooper Industries, Inc. 78,700 3,856,300
Eaton Corp. 67,000 5,979,750
General Electric Co. 130,000 9,538,750
Loews Corp. 67,700 7,176,200
Tyco International Ltd. 115,584 5,208,504
------------
35,021,117
------------
DRUGS & HEALTH CARE (9.5%)
Alza Corp. (a) 84,100 2,675,432
American Home Products Corp. 80,000 6,125,000
Crescendo Pharmaceuticals Corp. (a) 4,150 48,244
DENTSPLY International, Inc. 107,600 3,281,800
Elan Corp. ADR (a) 169,700 8,686,519
Eli Lilly & Co. 113,000 7,867,625
Forest Laboratories, Inc. (a) 51,600 2,544,525
Genzyme Corp. (a) 104,800 2,934,400
HEALTHSOUTH Corp. (a) 233,400 6,476,850
Henry Shein, Inc. (a) 78,400 2,744,000
Humana, Inc. (a) 212,000 4,399,000
Medtronic, Inc. 141,500 7,411,062
Merck & Co., Inc. 25,500 2,709,375
Omnicare, Inc. 118,200 3,664,200
Pfizer, Inc. 170,400 12,705,450
R.P. Scherer Corp. (a) 58,700 3,580,700
SmithKline Beecham PLC ADR 52,000 2,674,750
Steris Corp. (a) 124,700 6,016,775
Tenet Healthcare Corp. (a) 187,300 6,204,313
United Healthcare Corp. 86,700 4,307,906
Warner-Lambert Co. 98,800 12,251,200
------------
109,309,126
------------
ELECTRIC & GAS UTILITIES (2.3%)
Dominion Resources, Inc. 59,800 2,545,238
Duke Energy Corp. 179,355 9,931,783
Edison International 58,800 1,598,625
Florida Progress Corp. 56,000 2,198,000
See Notes to Schedule of Investments.
---------[27]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
ELECTRIC & GAS UTILITIES (CONT.)
Houston Industries, Inc. 245,000 $ 6,523,125
P G & E Corp. 69,000 2,100,188
Southern Co. 65,000 1,681,875
------------
26,578,834
------------
ELECTRONICS & ELECTRICAL EQUIPMENT (4.0%)
Anixter International, Inc. (a) 59,300 978,450
Arrow Electronics, Inc. (a) 270,000 8,758,125
Berg Electronics Corp. (a) 102,500 2,331,875
General Semiconductor, Inc. (a) 42,025 485,914
International Game Technology 152,700 3,855,675
Input/Output, Inc. (a) 61,500 1,825,781
Linear Technology Corp. 91,700 5,272,750
Molex, Inc. 154,875 4,975,359
Motorola, Inc. 98,800 5,637,775
Perkin-Elmer Corp. 41,500 2,949,094
Raytheon Co. Class A 9,196 453,460
Raytheon Co. Class B 124,100 6,267,050
Sensormatic Electronics Corp. 153,400 2,511,925
------------
46,303,233
------------
FINANCIAL SERVICES (5.8%)
Beneficial Corp. 88,500 7,356,562
Countrywide Credit Industries, Inc. 150,000 6,431,250
Federal Home Loan Mortgage Corp. 340,000 14,258,750
Federal National Mortgage Co. 98,800 5,637,775
Merrill Lynch & Co., Inc. 18,200 1,327,463
Morgan Stanley, Dean Witter, Discover & Co. 160,000 9,460,000
Paychex, Inc. 157,100 7,953,187
Travelers Group, Inc. 255,000 13,738,125
------------
66,163,112
------------
FOOD, BEVERAGE & RESTAURANTS (4.2%)
Anheuser Busch, Inc. 212,600 9,354,400
Campbell Soup Co. 105,000 6,103,125
Diageo PLC ADR 120,000 4,545,000
Dole Food Co. 150,000 6,862,500
Dreyers Grand Ice Cream 148,800 3,589,800
General Mills, Inc. 80,700 5,780,138
Landry's Seafood Restaurants, Inc. (a) 15,000 360,000
Starbucks Corp. (a) 150,300 5,767,763
Wendy's International, Inc. 256,100 6,162,406
------------
48,525,132
------------
See Notes to Schedule of Investments.
---------[28]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
HOTELS & ENTERTAINMENT / LEISURE (0.4%)
Marriott International, Inc. 25,000 $ 1,731,250
Time Warner, Inc. 54,500 3,379,000
------------
5,110,250
------------
INDUSTRIAL EQUIPMENT (2.4%)
Caterpillar, Inc. 130,000 6,313,125
Deere & Co. 112,500 6,560,156
Fastenal Co. (a) 164,100 6,276,825
JLK Direct Distribution, Inc. (a) 125,200 3,505,600
New Holland NV 207,500 5,485,781
------------
28,141,487
------------
INSURANCE (7.1%)
AEGON NV 33,915 3,039,632
AFLAC, Inc. 200,000 10,225,000
Aon Corp. 155,675 9,126,447
CIGNA Corp. 36,400 6,299,475
Conseco, Inc. 132,100 5,994,038
EXEL Limited 225,000 14,259,375
Marsh & McLennan Companies, Inc. 41,400 3,086,888
Progressive Corp. 85,000 10,189,375
Providian Financial Corp. 236,800 10,700,400
Transamerica Corp. 85,000 9,052,500
------------
81,973,130
------------
METALS & MINING (1.2%)
Allegheny Teledyne, Inc. 166,000 4,295,250
Aluminum Company of America 85,600 6,024,100
Freeport-McMoRan Copper & Gold, Inc., Class A 185,000 2,913,750
------------
13,233,100
------------
OIL & GAS (7.6%)
Atlantic Richfield Co. 16,700 1,338,088
British Petroleum Co. ADR 26,532 2,114,269
Burlington Resources, Inc. 62,500 2,800,781
Elf Aquitaine ADR 113,200 6,636,350
Enron Corp. 63,800 2,643,712
Exxon Corp. 75,300 4,607,419
Kerr-McGee Corp. 107,300 6,793,431
Mobil Corp. 170,400 12,300,750
Pioneer Natural Resources Co. 84,800 2,453,900
See Notes to Schedule of Investments.
---------[29]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
OIL & GAS (CONT.)
Royal Dutch Petroleum Co. ADR 70,100 $ 3,798,544
Schlumberger Ltd. 86,400 6,955,200
Texaco, Inc. 202,400 11,005,500
Tosco Corp. 204,000 7,713,750
Triton Energy Corp. (a) 170,000 4,961,875
Union Pacific Resources Group 275,600 6,683,300
USX-Marathon Group 120,000 4,050,000
------------
86,856,869
------------
PAPER (0.8%)
Champion International Corp. 120,000 5,430,000
Temple-Inland, Inc. 74,400 3,892,050
------------
9,322,050
------------
POLLUTION CONTROL (0.4%)
Waste Management, Inc. 155,800 4,284,500
------------
PUBLISHING (1.4%)
American Greetings Corp., Class A 140,400 5,493,150
Gannett Co., Inc. 98,200 6,069,987
R. R. Donnelley & Sons Co. 120,000 4,470,000
------------
16,033,137
------------
REAL ESTATE INVESTMENT TRUST (1.5%)
Crescent Real Estate Equities Co. 90,000 3,543,750
Equity Office Properties Trust 75,377 2,379,087
Patriot American Hospitality, Inc. 92,000 2,650,750
Starwood Lodging Trust 117,700 6,811,888
Vornado Realty Trust 50,000 2,346,875
------------
17,732,350
------------
RETAIL TRADE (7.4%)
Arbor Drugs, Inc. 242,900 4,493,650
CDW Computer Centers, Inc. (a) 73,500 3,831,187
Circuit City Stores, Inc. 105,100 3,737,619
Corporate Express, Inc. (a) 321,900 4,144,462
CVS Corp. 76,400 4,894,375
Dollar General Corp. 99,900 3,621,375
Family Dollar Stores 132,900 3,895,631
Federated Department Stores, Inc. (a) 52,000 2,239,250
Home Depot, Inc. 103,550 6,096,506
See Notes to Schedule of Investments.
---------[30]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Schedule of Investments
COMMON STOCKS (CONT.) SHARES MARKET VALUE
================================================================================
RETAIL TRADE (CONT.)
May Department Stores Co. 262,000 $ 13,804,125
MSC Industrial Direct Co. (a) 136,900 5,749,800
Quality Food Centers, Inc. (a) 83,700 5,607,900
Safeway, Inc. (a) 44,100 2,783,812
Staples, Inc. (a) 301,200 8,395,950
Toys R Us, Inc. (a) 142,700 4,477,212
Walgreen Co. 154,200 4,838,025
Wal-Mart Stores, Inc. 70,600 2,784,287
------------
85,395,166
------------
TELECOMMUNICATIONS (9.0%)
ADC Telecommunications, Inc. (a) 96,700 4,049,312
Bay Networks, Inc. (a) 153,600 3,926,400
Bell Atlantic Corp. 63,000 5,725,125
Brightpoint, Inc. (a) 153,400 2,118,838
CommScope, Inc. (a) 56,033 752,943
GTE Corp. 152,100 7,947,225
Lucent Technologies, Inc. 78,100 6,238,237
MCI Communications Corp. 130,000 5,565,625
Nextlevel Systems, Inc. (a) 168,000 3,003,000
Nokia Corp. ADR 100,000 7,000,000
SBC Communications, Inc. 243,300 17,821,725
Scientific-Atlanta, Inc. 332,000 5,561,000
Sprint Corp. 229,300 13,399,719
TCI Communications, Inc. (a) 34,800 2,231,550
TCI Pacific, Class A 15,600 2,574,000
TCI Satellite Entertainment, Inc. (a) 84,000 577,500
Tele-Communications - TCI Ventures Group, Class A (a) 159,081 4,503,981
US West Media Group (a) 100,700 2,907,712
WorldCom, Inc. (a) 248,200 7,508,050
------------
103,411,942
------------
TRANSPORTATION (2.7%)
AMR Corp. (a) 75,000 9,646,875
Burlington Northern Santa Fe 69,500 6,459,156
CSX Corp. 77,700 4,195,800
Delta Air Lines, Inc. 23,600 2,809,875
Union Pacific Corp. 119,400 7,455,037
------------
30,566,743
------------
See Notes to Schedule of Investments.
---------[31]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Schedule of Investments
MARKET
COMMON STOCKS (CONT.) SHARES VALUE
===============================================================================
TOTAL COMMON STOCKS (Cost $856,959,325) $1,163,080,502
--------------
PREFERRED STOCKS (0.2%)
ELECTRIC UTILITIES (0.2%)
Houston Industries 7% Convertible
(Cost $2,793,250) 50,000 2,853,125
--------------
CONVERTIBLE BONDS & NOTES (0.4%)
DIVERSIFIED (0.4%) PAR VALUE
=========
Berkshire Hathaway Sr. Note 1.00% 12/03/01
(Cost $2,828,707) $2,700,000 4,355,640
--------------
SHORT-TERM INVESTMENTS (2.3%) INTEREST MATURITY
COMMERCIAL PAPER (0.3%) RATE DATE
======== ========
Household Finance Corp. 6.08% 01/02/98 500,000 499,916
Household Finance Corp. 6.10 01/05/98 3,300,000 3,297,763
--------------
TOTAL COMMERCIAL PAPER 3,797,679
--------------
REPURCHASE AGREEMENT (2.0%)
ABN AMRO Chicago Corp., Repurchase Agreement dated
12/31/97, 6.60% to be repurchased at $22,576,275
on 01/2/98, collateralized by U.S. Treasury notes
maturing in 2016, with a current market value of
$23,088,561. 22,568,000 22,568,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $26,365,679) 26,365,679
--------------
TOTAL INVESTMENTS (104.0%) (COST $888,946,961) (b) 1,196,654,946
OTHER ASSETS AND LIABILITIES, NET (-4.0%) (46,316,263)
--------------
NET ASSETS (100.0%) $1,150,338,683
==============
NET ASSET VALUE PER SHARE (86,362,669 SHARES OUTSTANDING) $ 13.32
==============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes is $890,809,749.
Gross unrealized appreciation and depreciation of investments at
December 31, 1997, is as follows:
Gross unrealized appreciation $ 330,276,412
Gross unrealized depreciation (24,431,215)
-------------
Net unrealized appreciation $ 305,845,197
=============
Acronym Name
- ---------- ---------------------------
ADR American Depository Receipt
See Notes to Financial Statements.
---------[32]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Statement of Assets and Liabilities
December 31, 1997
ASSETS:
Investments at market value (identified cost
$888,946,961) $ 1,196,654,946
Cash 264,644
Receivable for investments sold 5,301,258
Dividends and interest receivable 1,090,467
Other assets 48,201
---------------
TOTAL ASSETS 1,203,359,516
---------------
LIABILITIES:
Payable for investments purchased 9,264,892
Distributions payable to shareholders 12,077,652
Management fees payable 693,210
Administrative and bookkeeping fees payable 193,817
Accrued expenses 116,054
Accrued income tax 30,675,208
---------------
TOTAL LIABILITIES 53,020,833
---------------
NET ASSETS $ 1,150,338,683
===============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of
beneficial interest without par value authorized,
86,362,669 shares outstanding) $ 797,440,139
Accumulated net realized gains on investments
less distributions 45,190,559
Net unrealized appreciation on investments 307,707,985
---------------
TOTAL NET ASSETS APPLICABLE
TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST
($13.32 PER SHARE) $ 1,150,338,683
===============
See Notes to Financial Statements.
---------[33]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Statement of Operations
Year ended December 31, 1997
INVESTMENT INCOME:
Dividends $ 13,479,362
Interest 1,881,322
-------------
TOTAL INVESTMENT INCOME (NET OF
FOREIGN TAXES WITHHELD AT SOURCE
WHICH AMOUNTED TO $151,465) 15,360,684
EXPENSES:
Management fees $ 7,922,024
Administrative fee 2,025,069
Bookkeeping fee 239,161
Custodian and transfer agent fees 284,340
Proxy and shareholder communication expense 329,476
Printing expense 190,021
Legal and audit fees 84,954
Insurance expense 22,795
Trustees' fees and expense 51,197
Miscellaneous expense 5,809
------------
TOTAL EXPENSE 11,154,846
-------------
NET INVESTMENT INCOME 4,205,838
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Sale of investments 234,528,620
Provision for federal income tax (30,675,208)
------------
Net realized gain on investments after
provision for federal income tax 203,853,412
Net unrealized appreciation on investments:
Beginning of year 290,828,589
End of year 307,707,985
------------
Change in unrealized appreciation-- net 16,879,396
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 224,938,646
=============
See Notes to Financial Statements.
---------[34]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Statements of Changes in Net Assets
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 4,205,838 $ 6,708,437
Net realized gain on investments
after provision for federal income tax 203,853,412 104,260,734
Change in unrealized appreciation-- net 16,879,396 59,017,670
--------------- -------------
Net increase in net assets resulting
from operations 224,938,646 169,986,841
--------------- -------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (4,205,838) (6,708,437)
Net realized gain on investments (107,028,243) (87,663,477)
--------------- -------------
Total distributions (111,234,081) (94,371,914)
--------------- -------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital
share transactions 48,707,853 40,600,510
--------------- -------------
Total increase in net assets 162,412,418 116,215,437
NET ASSETS:
Beginning of year 987,926,265 871,710,828
--------------- -------------
End of year $ 1,150,338,683 $ 987,926,265
=============== =============
See Notes to Financial Statements.
---------[35]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.05 0.08 0.10 0.11 0.12
Net realized and unrealized gains
(losses) on investments 3.01(a) 2.15(a) 2.71 (0.20) 0.78(a)
Provision for federal income tax (0.36) (0.13) -- -- (0.18)
------- ------- ------- ------- -------
Total from Investment Operations 2.70 2.10 2.81 (0.09) 0.72
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment income (0.05) (0.08) (0.10) (0.12) (0.12)
Distributions from realized capital gains (1.28) (1.10) (0.94) (0.52) (0.58)
Return of capital -- -- -- (0.36) (0.37)
------- ------- ------- ------- -------
Total Distributions (1.33) (1.18) (1.04) (1.00) (1.07)
------- ------- ------- ------- -------
Change due to rights offerings (b) -- -- -- (0.05) (0.03)
------- ------- ------- ------- -------
Net asset value at end of year $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
======= ======= ======= ======= =======
Per share market value at end of year $13.313 $11.250 $10.875 $ 8.500 $11.125
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 26.6% 21.7% 31.8% (0.08)% 8.8%
Based on market price 34.4% 16.2% 41.4% (14.9)% 12.7%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $1,150 $988 $872 $710 $725
Ratio of expenses to average net assets 1.01% 1.03% 1.06% 1.07% 1.08%
Ratio of net investment income to
average net assets 0.38% 0.73% 0.92% 1.16% 1.08%
Portfolio turnover rate 99% 70% 54% 44% 72%
Average commission rate (d) $0.0502 $0.0537 -- -- --
</TABLE>
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offering for shares at a price below net
asset value.
(c) Calculated assuming all distributions reinvested and all rights
exercised.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate paid per share for trades
on which commissions are charged.
See Notes to Financial Statements.
---------[36]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Notes to Financial Statements
December 31, 1997
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Equity Fund (All-Star or the Fund), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. All-Star's investment objective is to seek total
investment return, comprised of long-term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities. All-Star is managed by Liberty Asset Management Company (the
"Manager"). The Manager is a subsidiary of Liberty Financial Companies, Inc., a
publicly traded company of which Liberty Mutual Insurance Company is the
majority shareholder.
The following is a summary of significant accounting policies followed
by All-Star in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results, if different,
are expected to be immaterial to the net assets of the Fund.
VALUATION OF INVESTMENTS -- Portfolio securities listed on an exchange
and over-the-counter securities quoted on the NASDAQ system are valued on the
basis of the last sale on the date as of which the valuation is made, or,
lacking any sales, at the current bid prices. Over-the-counter securities not
quoted on the NASDAQ system are valued on the basis of the mean between the
current bid and asked prices on that date. Securities for which reliable
quotations are not readily available are valued at fair value, as determined in
good faith and pursuant to procedures established by the Board of Trustees.
Short-term instruments maturing in more than 60 days for which market quotations
are readily available are valued at the current market value. Short-term
instruments with remaining maturities of 60 days or less are valued at amortized
cost, unless the Board of Trustees determines that this does not represent fair
value.
PROVISION FOR FEDERAL INCOME TAX -- All-Star qualifies as a "regulated
investment company." As a result, a federal income tax provision is not required
for amounts distributed to shareholders. All-Star has elected to retain a
portion of its net realized long-term capital gains amounting to $87,643,452 and
has recorded a provision for federal income taxes thereon of $30,675,208.
OTHER -- Security transactions are accounted for on the trade date.
Interest income and expenses are recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date.
NOTE 2. FEES PAID TO AFFILIATES
Under All-Star's Management and Portfolio Management Agreements,
All-Star pays the Manager a management fee for its investment management
services at an annual rate of 0.80% of All-Star's average weekly net asset
value. The Manager pays each Portfolio Manager a portfolio management fee at an
annual rate of 0.40% of the average weekly net asset value of the portion of the
investment portfolio managed by it. All-Star also pays the Manager an
administrative fee for its administrative services at an annual rate of 0.20% of
All-Star's average weekly net asset value. The annual fund management and
administrative fees are reduced to 0.72% and 0.18%, respectively, on average
weekly net assets in excess of $400 million, and the aggregate annual fees
payable by the Manager to the Portfolio Managers are reduced to 0.36% of
All-Star's average weekly net assets in excess of $400 million. Effective August
1, 1997, the annual fund management and administrative fees were further reduced
to 0.648% and 0.162%, respectively, on average weekly net assets in excess of
$800 million to $1.2 billion and 0.584% and 0.146%, respectively, on average
weekly net assets in excess of $1.2 billion. The aggregate annual fees payable
by the Manager to the Portfolio Managers are also reduced to 0.324% of the
Fund's average weekly net assets in excess of $800 million to $1.2 billion and
0.292% of the Fund's average net assets in excess of $1.2 billion. Colonial
Management Associates, Inc., an affiliate of the Manager, provides bookkeeping
and pricing
---------[37]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Notes to Financial Statements
services for $36,000 per year plus 0.0233% of All-Star's average weekly net
assets over $50 million, 0.0167% in excess of $500 million, and 0.015% in excess
of $1 billion.
Under the terms of a settlement of litigation initiated in 1988, the
Manager, until July 31, 1997, made monthly rebates of a portion of its fee for
investment management services in the amount of 3.875% of such fee. During the
year ended December 31, 1997, $177,551 in rebates was offset against management
fees of the Fund.
NOTE 3. CAPITAL TRANSACTIONS
During the year ended December 31, 1997 and December 31, 1996,
distributions in the amount of $48,707,853 and $40,600,510, respectively, were
paid in newly issued shares valued at market value or net asset value, but not
less than 95% of market value, resulting in the issuance of 3,656,443 and
3,687,524 shares, respectively.
NOTE 4. SECURITIES TRANSACTIONS
Realized gains and losses are recorded on the identified cost basis for
both financial reporting and federal income tax purposes. The cost of
investments purchased and the proceeds from investments sold excluding
short-term debt obligations for the year ended December 31, 1997, were
$1,061,079,219 and $1,122,256,154, respectively.
The Fund may enter into repurchase agreements and require the seller of
the instrument to maintain on deposit with the Fund's custodian bank or in the
Federal Reserve Book-Entry System securities in the amount at all times equal to
or in excess of the value of the repurchase agreement, plus accrued interest.
The Fund may experience costs and delays in liquidating the collateral if the
issuer defaults or enters bankruptcy.
NOTE 5. DISTRIBUTIONS TO SHAREHOLDERS
All-Star currently has a policy of paying distributions on its common
shares totaling approximately 10% of its net asset value per year, payable in
four quarterly distributions of 2.5% of All-Star's net asset value at the close
of the New York Stock Exchange on the Friday prior to each quarterly
declaration date.
Distributions to shareholders are recorded on the ex-dividend date. The
characterization of income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. Reclassifications are made to the Fund's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations.
---------[38]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Independent Auditors' Report
[logo]KPMG Peat Marwick LLP
The Board of Trustees and Shareholders
Liberty All-Star Equity Fund:
We have audited the accompanying statement of assets and liabilities of Liberty
All-Star Equity Fund (the Fund), including the schedule of investments, as of
December 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Investment securities held in custody are
confirmed to us by the custodian. As to securities purchased and sold, but not
received or delivered, we request confirmations from brokers and, where replies
are not received, we carry out other appropriate procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Liberty All-Star Equity Fund as of December 31, 1997, the results of its
operations for the year then ended, changes in its net assets for each of the
years in the two-year period then ended, and financial highlights for each of
the years in the five-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 13, 1998
---------[39]---------
<PAGE>
LIBERTY ALL [star symbol] STAR EQUITY FUND
................................................................................
Tax Information
All 1997 distributions whether received in cash or shares of the Fund consist
of the following:
(1) ordinary dividend income
(2) 28% rate gains distributions and
(3) 20% rate gains distributions.
Below is a table that details the breakdown of each 1997 distribution for
Federal income tax purposes.
TAX STATUS OF 1997 DISTRIBUTIONS (unaudited)
================================================================================
ORDINARY INCOME
-------------------------
NET SHORT-TERM
AMOUNT INVESTMENT CAPITAL 28% RATE 20% RATE
DATE PAID PER SHARE INCOME GAINS GAINS GAINS
- --------------------------------------------------------------------------------
03/24/97 $0.32 16.14% 52.25% 31.61% --
- --------------------------------------------------------------------------------
07/07/97 0.32 -- 19.61% 60.40% 19.99%
- --------------------------------------------------------------------------------
10/06/97 0.35 -- 17.68% 61.85% 20.47%
- --------------------------------------------------------------------------------
01/05/98 0.34 -- 17.94% 61.66% 20.40%
UNDISTRIBUTED NET REALIZED CAPITAL GAINS
- --------------------------------------------------------------------------------
The Fund has elected to retain a portion of net capital gains realized during
the year ended December 31, 1997 and has paid the applicable Federal income tax
thereon.
28% rate gains retained ........ $0.77 per share
20% rate gains retained ........ $0.26 per share
-----
Total capital gains retained ... $1.03 per share
=====
Federal income tax paid ........ $0.36 per share
FOR CORPORATE SHAREHOLDERS
- --------------------------------------------------------------------------------
36% of the ordinary income dividends qualify for the 70% dividend received
deduction available for corporations for the year ended December 31, 1997.
---------[40]---------
<PAGE>
[Back Cover]
[Logo] LIBERTY
ALL [star symbol] 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 & 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 LLP
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 & 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).
[Logo] LIBERTY
FINANCIAL
