FUND MANAGER'S LETTER
- --------------------------------------------------------------------------------
To Our Fellow Shareholders: August 1998
The net asset value (NAV) of a common share of the Fund declined from $14.80
on March 31, 1998, to $14.42 on June 30, 1998, after deducting the distribution
of 37 cents declared during the quarter. The market price of a share of the Fund
traded in a range from $12.875 to $14.688 before closing the quarter at $13.688.
The ending price represented a discount to NAV of 5.1 percent compared with a
discount to NAV of 3.7 percent on March 31, 1998. Key investment results and
comparisons are noted below.
As the table shows, the Fund's net asset value increased 0.9 percent
during the second quarter, which compares with 0.3 percent for the Lipper Growth
& Income Mutual Fund Average (the Fund's primary benchmark) and 3.3 percent and
2.1 percent for the S&P 500 Stock Index and Dow Jones Industrial Average,
respectively. For the latest six months, the Fund's net asset value was up 14.7
percent compared with 12.1 percent for the Lipper Growth &Income Mutual Fund
Average and 17.7 and 14.1 percent for the S&P 500 and Dow Jones, respectively.
The S&P 500 continued its advance for an unprecedented 14th quarter in a
row, ending the quarter at 1133.84. But, as has been the case so often during
the past several years, the capitalization-weighted indices such as the S&P 500
gave a distorted picture of how most stocks performed.
Capitalization-weighted means that each stock is weighted by the total
value of outstanding shares. The largest capitalization stock in the S&P 500 is
that of General Electric at about $293 billion; the smallest is that of Armco at
about $566 million. So, G.E. has more than 500 times the impact on the return of
the capitalization-weighted S&P 500 than Armco does. Thus, the S&P 500 is
heavily influenced by the largest capitalization stocks. The five largest
companies, only 1% of the total number of stocks in the index, account for 12.3
percent of the index's capitalization. During the second quarter, those same
five stocks accounted for more than one-third of the S&P 500's 3.3 percent
return.
Another way to assess how large stocks influence the return of the S&P500
is to calculate how the index performs on an equal-weighted basis, giving each
stock, regardless of size, equal representation. The equal-weighted S&P500 index
had a negative 1.0 percent second quarter return, or 4.3 percent less than the
capitalization-weighted index.
The chart on the following page illustrates how the equal- and
capitalization-weighted S&P 500 indices have performed since the beginning of
this bull market in 1982. Most managers, including those in your Fund, have
portfolios that are more like equal- than like capitalization-weighted to avoid
undue concentration. Therefore, they tended to outperform the
capitalization-weighted index during periods like 1982 - 1983 and 1991- 94, when
the equal-weighted index outperformed by a considerable margin. Conversely,
during periods where leadership was dominated by a narrow group of very large
stocks, like 1989 - 90 and 1995 - 98, most managers found it difficult to exceed
the return of the capitalization-weighted index. As you can see from the chart,
it would be unusual, based on the last 15 years' history, for present conditions
to persist much longer.
<TABLE>
<CAPTION>
Second Quarter Latest Six Months
- --------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND:
<S> <C> <C>
Shares Valued at Net Asset Value 0.9% 14.7%
Shares Valued at Net Asset Value
With Dividends Reinvested 1.0% 14.9%
Shares Valued at Market Price
With Dividends Reinvested (0.4%) 9.1%
Fund's Closing Price Range $14.50 to $12.938 $14.50 to $12.813
Fund's (Discount)/Premium Range (8.6%) to (2.4%) (8.6%) to 2.5%
Lipper Growth & Income Mutual Fund Average 0.3% 12.1%
S&P 500 Stock Index 3.3% 17.7%
Dow Jones Industrial Average 2.1% 14.1%
NASDAQ Composite Index 3.2% 20.7%
</TABLE>
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. The Fund's reinvested returns assume the exercise of all
primary subscription rights in the recent rights offering. 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.
1
<PAGE>
FUND MANAGER'S LETTER
- --------------------------------------------------------------------------------
[S&P GRAPHIC]
S&P 500 Equal-Weighted vs. S&P 500 Cap-Weighted
Calendar Year Performance Since 1982
S&P Equal-Weighted S&P Cap-Weighted
Outperformed Outperformed
82 10.1%
83 8.1%
84 0.1%
85 -0.6%
86 -1.0%
87 0.1%
88 3.9%
89 -5.4%
90 -8.8%
91 4.9%
92 7.1%
93 4.8%
94 0.8%
95 -4.1%
96 -3.9%
97 -4.4%
98-YTD* -5.7%
*Through June 30, 1998
Mr. Harold W. Cogger, Chairman of the Board of Trustees since April 1996,
has retired and Mr. John V.Carberry has been elected by the Board to replace
him. Hal served the Fund with distinction. We thank him and wish him well in his
retirement. John is a Senior Vice President of Liberty Financial Companies,
Inc., the parent company of Liberty Asset Management Company ("LAMCO"), and has
more than 25 years' experience in the financial services industry.
Mr. William R. Parmentier has been appointed President and Chief Executive
Officer of LAMCO, the Fund's Manager, to succeed Richard R. Christensen, who
assumes the position of Chairman. Messrs. Christensen and Parmentier will retain
their current positions as President and Chief Investment Officer, respectively,
of the Fund until Mr. Christensen retires in 1999.
The Fund's net realized capital gains for 1998 are likely to exceed the
minimum amount required to be distributed under the Fund's 10 percent pay-out
policy. This is the result of realization of gains after the strong investment
performance during the last three and one-half years. LAMCO plans to recommend
to the Trustees, for consideration at their October meeting, that the Fund
retain the excess gains, as it did the last two years. In order to retain the
excess gains, the Fund would pay federal income tax on the retained gains. The
shareholders would be required to record their pro-rata portion of the gains
retained by the Fund as a long-term capital gain, and their pro-rata portion of
the tax paid by the Fund would be claimed by the shareholders as a credit on
their 1998 federal income tax return. Additional information will be contained
in the third quarter report.
For the second quarter distribution more than 61 percent of the Fund's
individual shareholders elected to take newly issued shares, valued at the
closing market price of $13.125 on July 6. The distribution consisted entirely
of net realized capital gains. By taking newly issued shares, rather than cash,
shareholders are able to reinvest their capital gains in the fund so they can
build additional value through compounding. Reinvested dividends constitute a
major source of shareholder investment growth, as the chart on page 3 clearly
demonstrates.
Boston Partners Asset Management, L.P., the newest of the Fund's five
independent Portfolio Managers, is the subject of the manager interview
beginning on page 8. Mark Donovan, Chairman of the Equity Strategy Committee,
discusses the firm's investment philosophy and decision making process as well
as particular stocks that are representative of its style of investing.
Thank you for your continuing support of the Fund.
Sincerely,
/s/Richard R. Christensen /s/William R. Parmentier, Jr.
- ------------------------- -----------------------------
Richard R. Christensen William R. Parmentier, Jr.
President, Liberty All-Star Chief Investment Officer,
Equity Fund Liberty All-Star Equity Fund
Chairman, Liberty Asset President, Liberty Asset
Management Company Management Company
2
<PAGE>
SHAREHOLDERS' INVESTMENT GROWTH AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
[mountain chart]
Net Asset
Value of Additional
Shares Acquired Investments
Net Asset Value Through Dividend Made Through
of One Share Reinvestment Rights Offerings
$10.17 $10.17 $10.17
10.87 10.87 10.87
10.03 11.09 11.09
10.72 10.77 10.77
10.81 10.86 10.86
11.23 11.32 11.32
11.73 11.82 11.82
11.6 12.39 12.39
10.87 11.94 11.94
8.31 9.12 9.12
7.58 8.32 8.32
7.9 9.01 9.01
8.29 9.45 9.45
8.64 9.85 9.85
8.29 9.51 9.51
8.3 9.52 9.52
8.26 9.47 9.47
8.43 9.95 9.95
8.33 9.83 9.83
8.12 9.58 9.58
8.28 10.05 10.05
8.43 10.23 10.23
8.3 10.08 10.08
8.29 10.34 10.34
8.83 11.01 11.01
8.67 10.81 10.81
8.6 11.03 11.03
9.01 11.56 11.56
9.4 12.06 12.06
9.07 12 12
9.81 12.98 12.98
10.03 13.27 13.27
9.82 13.38 13.38
9.61 13.1 13.1
9.72 13.25 13.25
9.58 13.44 13.44
9.02 12.66 12.66
9.11 12.78 12.78
9.14 13.18 13.18
9 12.98 12.98
9.92 14.3 14.3
9.72 14.42 14.42
9.69 14.38 14.38
8.91 13.22 13.22
8.23 12.59 12.59
8.21 12.56 12.56
8.77 13.42 13.42
8.92 14.01 14.01
9.37 14.72 14.72
10.04 15.77 15.77
10.18 16.42 16.42
10.11 16.30 16.309999
10.62 17.12 17.129999
9.87 16.33 16.33
10.35 17.12 17.129999
10.39 17.65 17.65
10.33 17.54 17.549999
10.52 17.87 17.870001
9.92 17.28 17.280001
11.2 19.51 19.51
11 19.16 19.16
10.77 19.25 19.25
10.56 18.87 18.870001
10.66 19.04 20.959999
10.76 19.23 21.15
10.23 18.77 20.65
10.69 19.59 21.559999
10.21 19.18 21.110001
10.45 19.63 21.610001
10.55 19.82 21.82
10.68 20.57 22.639999
10.78 20.76 22.85
10.86 20.92 23.02
10.7 20.61 22.68
10.75 21.23 23.370001
10.42 20.58 22.65
10.52 21.29 23.440001
10.56 21.37 23.530001
10.54 21.33 23.48
10.73 22.26 24.52
10.79 22.38 24.66
10.84 22.49 26.27
10.34 22 25.690001
10.4 22.48 26.25
10.77 23.28 27.18
10.34 22.91 26.75
9.85 21.83 25.48
9.93 22 25.690001
9.8 22.26 25.98
9.48 21.53 25.129999
9.78 22.20 25.93
9.99 23.28 27.17
9.69 22.58 27.860001
9.86 22.96 28.35
9.17 21.96 27.110001
9.26 22.19 27.790001
9.4 22.52 26.75
9.49 23.30 28.780001
9.83 24.13 29.780001
9.98 24.51 30.24
10.13 25.49 31.440001
10.53 26.49 32.689999
10.95 27.54 33.990002
10.74 27.73 34.209999
11.05 28.53 35.189999
10.93 28.21 34.810001
11.04 29.23 36.07
11.03 29.20 36.040001
11.39 30.16 37.209999
11.57 30.63 37.799999
11.42 31.01 38.259998
11.65 31.62 39.029999
11.62 32.41 40.009998
11.53 32.16 39.700001
10.88 30.36 37.459999
10.98 31.41 38.759998
11.71 33.5 31.34
11.88 33.99 41.939999
12.35 36.31 44.810001
11.95 35.54 43.860001
12.65 37.61 46.43
12.55 37.32 46.060001
11.73 35.81 44.189999
12.19 37.22 45.919998
12.77 39.95 49.299999
13.31 41.65 51.389999
14.29 44.70 55.169998
13.34 42.81 52.830002
14.01 44.95 55.48
13.51 43.34 53.5
13.52 44.49 54.919998
13.32 45.02 55.57
13.3 44.95 55.490002
14.4 48.66 60.080002
14.8 51.24 63.259998
14.93 51.63 63.77
14.05 48.59 60.009998
14.42 51.29 65.830002
[values are from 1987 to 1998]
$65.83----| 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,
$51.29----| 1993, 1994, and 1998.
$14.42---- This is the net asset value of one share of All-Star as of 6/30/98.
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, four 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; the one in
September 1994 allowed investors to acquire one share at $9.14 for every 15
shares held; and the one in April 1998 allowed investors to acquire one share at
$12.83 for every 20 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 $65.83 (4.565 shares times the current $14.42 net asset value
per share) and a market price value of $62.48 (4.565 shares times the current
$13.688 market price per share). Excluding the rights offerings shares, an
original share has grown to 3.557 shares. Thus, the original share has grown to
a net asset value of $51.29 (3.557 shares times the current $14.42 net asset
value per share) and a market price value of $48.69 (3.557 shares times the
current $13.688 market price per share).
3
<PAGE>
A TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Shares
Shares Purchased Acquired Shares NAV(1) Market PriceTotal Market
Owned At Through Through Owned Per Share Total NAV Per Share Price Of
Beginning Per ShareReinvestment Rights At End At End Of Shares At End Shares
Year Of Period Distributions Program Offering Of Period Of Period Owned Of Period Owned
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1.000 $1.18 .140 -- 1.140 $7.90 $9.01 $6.00 $6.84
- --------------------------------------------------------------------------------------------------------------------
1988 1.140 0.64 .107 -- 1.247 8.29 10.34 7.25 9.04
- --------------------------------------------------------------------------------------------------------------------
1989 1.247 0.95 .156 -- 1.403 9.58 13.44 8.25 11.57
- --------------------------------------------------------------------------------------------------------------------
1990 1.403 0.90 .167 -- 1.570 8.92 14.00 7.75 12.17
- --------------------------------------------------------------------------------------------------------------------
1991 1.570 1.02 .171 -- 1.741 11.20 19.50 10 .75 18.72
- --------------------------------------------------------------------------------------------------------------------
1992 1.741 1.07 .199 0.179(2) 2.119 10.78 22.84 11.125 23.57
- --------------------------------------------------------------------------------------------------------------------
1993 2.119 1.25(3) .266 0.138(2) 2.523 10.40 26.24 11.125 28.07
- --------------------------------------------------------------------------------------------------------------------
1994 2.523 1.00 .278 0.155(2) 2.955 9.26 27.36 8.50 25.12
- --------------------------------------------------------------------------------------------------------------------
1995 2.955 1.04 .310 -- 3.265 11.03 36.01 10.875 35.51
- --------------------------------------------------------------------------------------------------------------------
1996 3.265 1.31(3) .403 -- 3.668 11.95 43.83 11.25 41.27
- --------------------------------------------------------------------------------------------------------------------
1997 3.668 1.69(3) .501 -- 4.169 13.32 55.53 13.313 55.50
- --------------------------------------------------------------------------------------------------------------------
1998
1st Quarter 4.169 0.35 .102 -- 4.271 14.80 63.21 14.25 60.86
2nd Quarter 4.271 0.37 .121 0.173(2) 4.565 14.42 65.83 13.688 62.48
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
1998: Rights offering completed in April 1998. One share offered at $12.83
for every 20 shares owned.
3. 1993: Includes the $0.18 per share tax credit passed through to hareholders,
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.
4
<PAGE>
PORTFOLIO MANAGERS / PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
THE FUND'S FIVE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE ARE:
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Companies with low price-to-earnings and price-to-book ratios where a catalyst
for positive change has been identified.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Companies diversified across all sectors that are undervalued relative to
internally generated projected growth rates.
OPPENHEIMER CAPITAL
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital.
WESTWOOD MANAGEMENT CORPORATION
Growth companies selling at reasonable valuations based on higher internal
earnings projections which are not yet being reflected in consensus estimates.
WILKE/THOMPSON CAPITAL MANAGEMENT, INC.
Growth companies that demonstrate the ability to sustain strong secular growth,
notwithstanding economic conditions, across a broad range of market
capitalizations.
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN PORTFOLIO CHARACTERISTICS
The Portfolio Characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of a
multi-managed portfolio. The characteristics are different for each of the
Fund's five Portfolio Managers. These differences are a reflection of the fact
that each pursues a different Investment Style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Stock Index.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS INVESTMENT STYLE SPECTRUM
AS OF JUNE 30, 1998
(UNAUDITED) VALUE GROWTH
===================================================
Boston J.P. Oppen- Wilke/ Total S&P
Partners Morgan heimer Westwood Thompson Fund 500 Index
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Holdings 37 83 30 49 49 220 500
- -------------------------------------------------------------------------------------------------------------------
Percent of Holdings in Top 10 39% 24% 50% 30% 32% 13% 20%
- -------------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $25 $38 $41 $29 $25 $32 $70
- -------------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth 11% 16% 19% 19% 34% 20% 17%
- -------------------------------------------------------------------------------------------------------------------
Dividend Yield 1.4% 1.4% 1.1% 1.4% 0.2% 1.1% 1.4%
- -------------------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 16x 23x 18x 26x 41x 23x 23x
- -------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 3.8x 4.8x 4.3x 4.0x 7.0x 4.7x 5.2x
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
TOP 50 HOLDINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
6/30/98 3/31/98 SECURITY NAME ($000) NET ASSETS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 6 Travelers Group, Inc. $19,879 1.5%
2 4 First Union Corp. 19,852 1.5
3 3 International Business Machines Corp. 19,033 1.4
4 5 EXEL Limited 17,119 1.3
5 7 Sprint Corp. 16,166 1.2
6 13 Monsanto Co. 15,801 1.2
7 18 Philip Morris Companies, Inc. 14,722 1.1
8 25 American Home Products Corp. 14,293 1.1
9 8 Federal Home Loan Mortgage Corp. 14,119 1.1
10 187 Federated Department Stores, Inc. 13,545 1.0
11 9 Citicorp 13,433 1.0
12 131 SLM Holding Corp. 13,068 1.0
13 19 Nokia Corp. ADR 13,061 1.0
14 11 Fleet Financial Group, Inc. 12,475 0.9
15 55 CVS Corp. 12,450 0.9
16 12 AFLAC,Inc. 12,125 0.9
17 16 Anheuser Busch, Inc. 11,924 0.9
18 1 SBC Communications, Inc. 11,828 0.9
19 28 AMR Corp. 11,655 0.9
20 17 Morgan Stanley Dean Witter & Co. 11,422 0.9
21 10 WorldCom, Inc. 11,397 0.9
22 2 Boeing Co. 11,306 0.9
23 New U.S.A. Waste Services, Inc. 10,902 0.8
24 78 AT&T Corp. 10,888 0.8
25 41 Conseco, Inc. 10,865 0.8
26 36 Starbucks Corp. 10,778 0.8
27 15 HBO & Co. 10,558 0.8
28 20 Avon Products, Inc. 10,463 0.8
29 34 Automatic Data Processing, Inc. 9,933 0.7
30 27 Progressive Corp. 9,870 0.7
31 21 GTE Corp. 9,868 0.7
32 30 May Department Stores Co. 9,825 0.7
33 29 Transamerica Corp. 9,786 0.7
34 138 Tosco Corp. 9,685 0.7
35 New Whirlpool Corp. 9,653 0.7
36 23 General Electric Co. 9,555 0.7
37 61 Cisco Systems, Inc. 9,478 0.7
38 New Fort James Corp. 9,114 0.7
39 39 Paychex, Inc. 9,081 0.7
40 59 Staples, Inc. 8,984 0.7
41 40 Elan Corp. ADR 8,470 0.6
42 26 Starwood Hotels & Resorts 8,431 0.6
43 91 Mobil Corp. 8,429 0.6
44 207 Kmart Corp. 8,376 0.6
45 183 Delta Air Lines, Inc. 8,285 0.6
46 New Ford Motor Co. 8,278 0.6
47 47 ELF Aquitaine ADR 8,250 0.6
48 69 Sterling Software, Inc. 8,228 0.6
49 24 Pfizer, Inc. 8,184 0.6
50 58 Houston Industries, Inc. 8,074 0.6
</TABLE>
6
<PAGE>
MAJOR STOCK CHANGES IN THE SECOND 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
second quarter of 1998, not including changes made in connection with the
substitution of Boston Partners Asset Management, L.P. for Palley-Needelman
Asset Management, Inc. as a Portfolio Manager effective May 11, 1998.
<TABLE>
<CAPTION>
SHARES
-----------------------------------------------------------
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 6/30/98
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Conseco, Inc. 87,000 232,400
Delta Air Lines, Inc. 40,500 64,100
Ford Motor Co. 140,300 140,300
Minnesota Mining & Manufacturing Co. 50,000 50,000
PeopleSoft, Inc. 86,200 86,200
Philip Morris Companies, Inc. 114,800 373,900
Union Pacific Corp. 106,400 106,400
Eaton Corp. 70,400 0
Providian Financial Corp. 199,800 0
SITEL Corp. 519,700 0
Tele Communications - TCI Ventures,
Class A 318,162 0
Warner-Lambert Co. * 43,200 82,800
</TABLE>
* Adjusted for stock split
7
<PAGE>
MANAGER INTERVIEW
- --------------------------------------------------------------------------------
[MARK E. DONOVAN PICTURE] MARK E. DONOVAN
Boston Partners
Asset Management, L.P.
Manager Interview: The Triad at Boston Partners
Is Value, Internal Research and Risk Aversion --
Enhanced by Employees Who Share the
Commitment of Ownership
Boston Partners Asset Management, L.P., is the newest of All-Star's five
portfolio management firms, having been named to the All-Star team in May 1998.
Boston Partners is+a value style manager investing in undervalued companies that
have sound business fundamentals and positive business momentum. The firm
searches for companies with+low price-to-earnings and price-to-book value ratios
where a catalyst for positive change has been identified. We+recently had the
opportunity to visit with Mark E. Donovan, CFA, who is a founder of the+firm and
who serves today as Chairman of the Equity Strategy Committee. The Fund Manager,
Liberty Asset Management Company (LAMCO), serves as moderator for the interview.
LAMCO: Welcome. As this is your first manager interview for a Liberty All-Star
Equity Fund quarterly report, perhaps the best place to start is with a
description of the firm -- when it was founded, its size, historical highlights.
DONOVAN: Boston Partners was founded in April 1995. While the firm has only been
in business a little more than three years, the staff is very experienced and,
in fact, many of us have worked together at another firm. Since our founding
we've expanded quite a bit. We now have 90 employees and our assets under
management have grown to about $16.5 billion, the vast majority of which is in
equities.
The firm is employee-owned -- that was true on day one, it's true today and
we expect it to be the case in the future. Having employees own and control the
business is really key. It's something that, we think, puts us in an
increasingly distinct position in the asset management business, where more and
more firms are part of much larger financial conglomerates.
LAMCO: How does that ownership position translate into a benefit for Fund
shareholders?
DONOVAN: I think what it really does is allow us to attract and retain the best
possible investment talent. There's no greater incentive to stay with an
organization for your career than to own a piece of the business. We have found
that to be an extremely effective tool in recruiting new analysts and
client+service professionals. If I had been asked while I was with+other firms
during my career what one of my main worries was, certainly one of them would
have been personnel turnover. In+Boston we have dozens of well-known investment
firms and they're always searching for talented people. So, having employees
with an equity position in the firm is just a tremendous way of retaining key
personnel. As a result, I feel All-Star shareholders are getting great talent
for the long term, which only serves to enhance the consistency that the Fund
Manager, Liberty Asset Management Company, strives to achieve with the Fund.
LAMCO: Describe your investment philosophy, objectives, style and process in
order for us to gain a better understanding of the firm.
DONOVAN: Boston Partners' overall equity investment philosophy emphasizes three
factors: value, internal research and risk aversion. We execute this philosophy
at the individual stock selection level by focusing on undervalued securities
and+companies that have sound business fundamentals and positive business
momentum. The strategy employs a bottom-up investment process to identify
portfolio candidates. There's no economic forecasting or stock market
forecasting that takes place within the construct of our decision making
process.
The decisions that we make are driven by internal fundamental research that
is streamlined by the use of quantitative screening. I characterize quantitative
screening as about 10 percent of the research process. It helps us to be much
more efficient in identifying companies within the large cap universe that
appear to offer attractive valuations and some quantifiable measure of business
momentum.
But, the quantitative research is really just the front end of the process.
It helps us focus our attention on the qualitative factors, where we spend most
of our time. I would characterize fundamental research as contributing about 90
percent of the research process.
[CALL OUT]
The views expressed in this interview represent the manager's views at the
time of the discussion and are subject to change.
8
<PAGE>
MANAGER INTERVIEW
- --------------------------------------------------------------------------------
The fundamental research provides us with a detailed analysis of the business
dynamics supporting a portfolio candidate's current value and the prospects for
future growth.
We're value managers -- it's the root of what we do. But beyond just looking
for inexpensive stocks, we want to identify stocks where we can see some
catalyst for future earnings improvement. That's what we believe will unlock a
stock's value over a reasonable timeframe.
LAMCO: What would an example of a catalyst be?
DONOVAN: I would say the most easily quantifiable catalyst, something that we
pay a lot of attention to, is the direction of earnings estimate revisions. We
very much want to own stocks of companies where Wall Street analysts are raising
earnings estimates as opposed to cutting them. First and foremost, a stock has
to pass the value test, but beyond that we put this "momentum overlay" on the
value analysis to help identify the most attractive purchase candidates.
I think we do a very good job of identifying these improving situations very
early in the process -- before Wall Street has jumped on the bandwagon. One of
the key means of+doing that is highly intensive balance sheet analysis. Most
people don't pay enough attention to a company's balance sheet, but what we have
found over the years is that the balance sheet can often times offer you clues
of a turn for the better or a turn for the worse in a company's near-term
business prospects. We look for clues such as improvements in inventory turnover
levels and shortening of+the accounts receivable days outstanding, and we also
pay+a lot of attention to the direction of free cash flow being generated, or
the net cash on the balance sheet.
LAMCO: Returning to your point about risk aversion, how do you go about
implementing that philosophy?
DONOVAN: Basically, a well executed value strategy is inherently less risky for
the investor. Presumably, one is buying stocks where there are underpinnings to
value, whether it's assets, earnings, or book value. Therefore, we believe that
every stock we buy has very good downside protection. That helps us more than
anything to preserve capital. Secondly, I think a well executed sell discipline
is also very important to maintaining a risk averse profile.
LAMCO: We were going to ask about your sell strategy anyhow, so why don't you
tell us about it now?
DONOVAN: Recall that there are three characteristics that+we're looking for in a
stock in order for us to purchase it. Once again, they are attractive valuation,
sound business fundamentals and a near-term catalyst as evidence of improving
business momentum. When any one of those three characteristics breaks down,
we're going to sell the stock. This is very important for us because when any
one of those characteristics is missing, you increase the risk profile of the
portfolio by continuing to own it.
We're quite ruthless in the sell decision. Often, we will sell a stock even
if it's still selling well below fair value if we think the catalyst that we had
identified at the time of purchase is either not playing out or some other
factor has come into play.
LAMCO: So, there's no price target involved?
DONOVAN: We do set price targets for every stock we buy and they are continually
reassessed while holding the stock. If a stock reaches the price target, that
will trigger a sell decision.
LAMCO: You said that you start with a macro screen and from there on really
carry on fundamental stock analysis. Who does this and how are decisions made?
DONOVAN: We have four full-time quantitative analysts who, among other things,
create the quantitative screens and continually reassess the ones that we're
using. Those screens are run every weekend and we review them in an investment
meeting that takes place every Tuesday morning. That meeting includes all of the
portfolio managers and all of the analysts. Collectively, we analyze these
screens with two objectives in mind. The first is to monitor all of our existing
securities to make sure they still exhibit the characteristics that we're
looking for in an attractive stock. The second purpose is to identify
interesting new ideas.
In any given week, we find roughly 10 to 12 stocks that are not owned and
that look potentially interesting as candidates for our client portfolios. We
assign these stocks to our research analysts for a more in-depth review. The
number one job of our fundamental analysts is to key in on the most important
and relevant issues for a company and continually ask the three
[CALL OUTS]
"I would characterize fundamental research as contributing about 90 percent of
the research process ... [it] provides us with a detailed analysis of the
business dynamics supporting a portfolio candidate's current value and the
prospects for future growth."
"Most people don't pay enough attention to a company's balance sheet, but ...
the balance sheet can often times offer you clues of a turn for the better or a
turn for the worse in a company's near-term business prospects."
9
<PAGE>
MANAGER INTERVIEW
- --------------------------------------------------------------------------------
fundamental questions about valuation, sound fundamentals and a near-term
catalyst. The analysts then report to our Equity Strategy Committee with their
written analysis and conclusions. This committee meets every Friday. I serve as
chair of the committee and have five other portfolio managers working with me.
The Equity Strategy Committee then scrutinizes the work of the analysts. We ask
what we think are the key questions and make sure we feel comfortable that all
the key investment issues have been identified and analyzed. Then, we make the
ultimate decision as to whether or not, in our judgment, the stock exhibits the
three characteristics that we look for.
Bottom line: Before a stock finds its way into the Fund's portfolio, it has been
subjected to very rigorous analysis.
LAMCO:If you had to single out one really differentiating or distinguishing
characteristic about Boston Partners, what would it be?
DONOVAN: As we talked about earlier, I think our single biggest advantage is our
broad-based employee ownership structure. Our ownership is spread among 39
partners, a group that includes all of the firm's senior investment
professionals. One benefit of this ownership structure is stability -- it
generates a commitment to the firm that is unlikely to be matched with any other
form of employee participation. It creates an emotional, financial and legal
commitment to the firm. Because the employee's own capital is at stake, the
interests of the employees and the clients are aligned. The other benefit is the
ability to attract and retain talented investment professionals. When we're on
campus recruiting at the leading business schools, we're competing with the top
firms in the business. Given our ownership structure, we have a strong
competitive advantage compared with most firms.
LAMCO: Can you give us some examples of stocks that you've added to the Fund's
portfolio and a rationale for each?
DONOVAN: Federated Department Stores is a name that we like a lot. It's among
the largest department store chains in the country and, although it has been
through some interesting times in the past, including a leveraged buyout, it is
a standout today. In a market where it can be a challenge to find high quality
companies at inexpensive valuations, Federated comes through in spades.
The stock currently trades at about 2.2 times book value, about 18 times this
year's estimated earnings and about 16 times next year's earnings. The 18 and 16
multiples would compare with average multiples in the stock market today of
about 21 times this year's and 19-1/2 times next year's earnings. The
price-to-book at 2.2 times is well below the market average, which we show as
being well north of 4 times right now. The company has made tremendous progress
at reducing its debt levels, which did get rather high a few years ago, peaking
in 1996 at about $6.4 billion. Federated is an excellent cash flow generator,
and as a result that debt level is down to about $4.3+billion. We expect that
deleveraging will continue in the future given the very attractive cash flow
characteristics of the business. Right now we have a very positive retail
environment, and with Federated you have strong franchises, such as Macy's,
Bloomingdale's and Rich's. We think the combination of these factors will drive
earnings growth for the foreseeable future.
LAMCO: How about another stock that you purchased for the Fund's portfolio?
DONOVAN: USA Waste is currently the number three player in the solid waste
management industry. However, within a few weeks the company will finalize an
acquisition of Waste Management. Once that deal is closed, USA Waste will be the
largest player in the industry. This is a company that has an extraordinary
growth record over the last several years, growing rapidly largely through
acquisition of smaller solid waste companies. It's also in an industry that is
consolidating and rewarding the surviving companies.
One of the things we look for in a company that has grown by acquisition is
how well they have done in terms of integrating the acquisitions. That can often
be a real challenge, but on that score USA Waste has an outstanding track
record. They are the low cost hauler of waste in the country and in a business
like this, which is essentially a commodity business, having that cost advantage
is a very important advantage. We especially like the USA Waste acquisition of
Waste Management because USA Waste has outstanding management talent and they'll
now be overseeing the excellent properties that Waste Management has.
We think the company will earn a little north of $3 a share next year after
the companies combine. At its current price of
[CALL OUT]
" ... our single biggest advantage is our broad-based employee ownership
structure. Our ownership is spread among 39 partners, a group that includes all
of the firm's senior investment professionals."
10
<PAGE>
MANAGER INTERVIEW
- --------------------------------------------------------------------------------
$49, USA Waste is a powerhouse that's selling at just 16 times earnings. The
management of USA Waste has indicated publicly that they think that they can
pull $800 million of cost out of+the combined companies. We think they're being
conservative and, in fact, they're beginning to acknowledge that. So, we think
that estimates for USA Waste, which have been trending up, will continue to rise
as the company realizes synergies and savings from the acquisition.
Another name that I would like to highlight is Delta Air Lines. We have
always been a little wary of the airline business. For years whenever the
industry had reasonably high returns, it drew in an enormous amount of
competition in the form of start-up airlines that would cut fares and destroy
returns in the business. That situation, while it hasn't entirely gone away, is
certainly alleviated. And, unlike most of the last decade-plus, there's no major
carrier in Chapter 11 bankruptcy protection right now. The airline industry also
has more rational pricing and there are some very real capacity constraints at
airports. You can't fly many more planes than we have now because airports just
don't have enough gates. That has created somewhat of a natural barrier to entry
in an industry that traditionally has had virtually no barriers. Finally, we
have a very healthy economy in which the industry is enjoying very high volumes
of business and leisure travel. Clearly, that is a cyclical element and we don't
delude ourselves into thinking it can continue forever. We watch it very
carefully, but for now the business trend for the whole industry remains very
strong.
A few years ago Delta was the darling of the industry. Then, it fell out of
favor and got lost within the pack. Today, we think they're turning things
around. There are a lot of talented new people in senior management who have
done an excellent job of reestablishing Delta's competitive position. The stock
right now trades at about 2.7 times book value, about 101/2 times this year's
earnings estimates and about 10 times next year's. So it's very inexpensive.
And, those estimates have been rising pretty steadily for the last several
months. Delta is also in a position where it's generating excess cash. This is a
company that, unlike some of the other carriers, has never been an active
repurchaser of its own shares. We think there's a good probability that sometime
this year Delta may announce a major share repurchase program, which will
further enhance the near-term earnings story for the company.
LAMCO: Your bottom-up orientation notwithstanding, could we close with your
thoughts on the stock market?
DONOVAN: We've had a near-perfect set of conditions for equity investors for the
last several years. We've had very healthy profit growth for corporate America.
We've obviously had a very sound economic backdrop here in the U.S. and in+many
key markets around the world. We've had low inflation and tremendous money flows
into the equity markets. The equity markets have truly benefited from ideal
economic conditions.
All that having been said, if you're looking for clouds on the horizon, there
are definitely a few out there. The one we are most focused on as value managers
is the overall valuation level of the market. The average stock in the S&P 500
now trades at well over 20 times earnings. That's expensive by any historical
measure. The bulls will tell you that you have to factor in low inflation and
interest rates, etcetera, etcetera, but at current multiples the market is
saying that this ideal set of conditions will continue for several more years. I
think you always have to be leary of such implicit optimism.
The second potential cloud on the horizon is the Asian situation. It's almost
a cliche to focus on Asia now, but it is a very real problem. Only now is it
starting to hit our shores in terms of its effect on profitability. Across a
number of industries, from steel to semiconductors, there are very real effects
showing up in companies' operating statistics.
At Boston Partners right now, we're focusing on the earnings picture for U.S.
companies. It looks like second quarter earnings are+going to come in in the
neighborhood of 2-3 percent above last year. Just two or three months ago,
consensus thinking was that we'd have 6 to 8 percent growth in corporate profits
in the second quarter. So, expectations have come down a lot. However, many
analysts have not yet adjusted second half numbers, and I think there may be
many more earnings disappointments to come.
How do we at Boston Partners deal with that? First off, I sleep a lot better
at night, and I hope our clients do, too, because of the overall valuation
characteristics of the Fund's portfolio. As we speak, the portion of the
portfolio that we manage carries a price-earnings multiple of 17 times estimated
earnings for 1998. That compares with over 21 times for the S&P 500. I also have
a higher confidence level in the earnings estimates for the companies we own in
the portfolio than I do for the average stock in the marketplace. Although I am
comfortable with the position of our portfolio, it is always wise for investors
to focus on the long-term benefits of investing in U.S. equity markets, rather
than on day-to-day price movements.
[CALL OUT]
"...I have a higher confidence level in the earnings estimates for the companies
we own in the portfolio than I do for the average stock in the marketplace."
11
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCKS (98.9%) SHARES MARKET VALUE
<S> <C> <C>
AEROSPACE & DEFENSE (1.7%)
Boeing Co. 253,700 $11,305,506
Litton Industries (a) 66,500 3,927,656
Lockheed Martin Corp. 64,200 6,797,175
-----------
22,030,337
-----------
AUTO, TIRES & ACCESSORIES (1.5%)
Chrysler Corp. 136,300 7,683,912
Ford Motor Co. 140,300 8,277,700
Lear Corp. (a) 70,700 3,627,794
-----------
19,589,406
-----------
BANKS (5.2%)
ABN AMRO Holding NV ADR 150,968 3,538,312
Ahmanson H. F. & Co. 90,000 6,384,375
Astoria Financial Corp. 21,100 1,128,850
Citicorp 90,000 13,432,500
First Union Corp. 340,800 19,851,600
Fleet Financial Group, Inc. 149,400 12,474,900
Nations Bank Corp. 23,300 1,782,450
Norwest Corp. 26,900 1,005,387
Washington Mutual, Inc. 56,100 2,436,844
Wells Fargo & Co. 20,700 7,638,300
-----------
69,673,518
-----------
BUSINESS SERVICES (2.0%)
America Online, Inc. (a) 71,600 7,589,600
Catalina Marketing Corp. (a) 72,600 3,770,662
Cintas Corp. 147,900 7,542,900
Robert Half International, Inc. (a) 141,500 7,906,312
-----------
26,809,474
-----------
CHEMICALS (2.7%)
Albemarle Corp. 57,600 1,270,800
Dow Chemical Co. 12,400 1,198,925
E.I. du Pont de Nemours & Co. 35,100 2,619,337
Monsanto Co. 282,800 15,801,450
Praxair, Inc. 125,200 5,860,925
Rohm & Haas Co. 11,500 1,195,281
Sherwin-Williams Co. 168,200 5,571,625
Union Carbide Corp. 52,200 2,786,175
-----------
36,304,518
-----------
COMMUNICATIONS EQUIPMENT (2.6%)
Black Box Corp. (a) 99,200 3,292,200
Cisco Systems, Inc. (a) 102,950 9,477,834
CommScope, Inc. (a) 56,033 907,034
Lucent Technologies, Inc. 93,400 7,769,712
Nokia Corp. ADR 180,000 13,061,250
-----------
34,508,030
-----------
COMPUTER & BUSINESS EQUIPMENT (4.0%)
Bay Networks, Inc. (a) 84,700 $ 2,731,575
Compaq Computer Corp. 230,900 6,551,787
EMC Corp. (a) 117,500 5,265,469
Ingram Micro, Inc., Class A (a) 126,900 5,615,325
International Business
Machines Corp. 165,775 19,033,042
Saville Systems Ireland
PLC ADR (a) 94,300 4,726,787
Sun Microsystems, Inc. (a) 103,000 4,474,062
Tech Data Corp. (a) 115,300 4,950,694
-----------
53,348,741
-----------
COMPUTER SERVICES &SOFTWARE (6.8%)
Acxiom Corp. (a) 216,300 5,393,981
Autodesk, Inc. 67,400 2,603,325
Automatic Data Processing, Inc. 136,300 9,932,862
CBT Group PLC ADR (a) 31,600 1,690,600
Computer Associates
International, Inc. 41,300 2,294,731
Concord EFS, Inc. (a) 178,050 4,651,556
Electronic Arts, Inc. (a) 61,800 3,337,200
Fiserv, Inc. (a) 161,400 6,854,464
HBO & Co. 299,000 10,558,437
HNC Software (a) 84,600 3,458,025
J. D. Edwards & Co. (a) 109,700 4,710,244
Microsoft Corp. (a) 71,600 7,759,650
Oracle Corp. (a) 100,450 2,467,303
PeopleSoft, Inc. (a) 86,200 4,051,400
Policy Management Systems (a) 104,000 4,082,000
Sterling Commerce, Inc. (a) 91,000 4,413,500
Sterling Software, Inc. (a) 278,900 8,227,550
Wang Laboratories, Inc. (a) 159,000 4,044,563
-----------
90,531,391
-----------
CONSUMER PRODUCTS (4.4%)
Hasbro, Inc. 65,800 2,582,650
Liz Claiborne, Inc. 128,900 6,743,081
Philip Morris Companies, Inc. 373,900 14,722,312
Polo Ralph Lauren Corp. (a) 103,000 2,884,000
Procter & Gamble Co. 59,400 5,409,112
Ralston Purina Co. 46,700 5,455,144
Unilever NV ADR 43,800 3,457,463
Warnaco Group, Class A 180,600 7,664,213
Whirlpool Corp. 140,400 9,652,500
-----------
58,570,475
-----------
COSMETICS & TOILETRIES (1.0%)
Avon Products, Inc. 135,000 10,462,500
Gillette Co. 46,000 2,607,625
-----------
13,070,125
-----------
12 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT.) SHARES MARKET VALUE
DIVERSIFIED (3.2%)
Allied Signal, Inc. 83,900 $ 3,723,062
Cooper Industries, Inc. 54,800 3,010,575
General Electric Co. 105,000 9,555,000
Loews Corp. 67,700 5,898,362
Minnesota Mining &
Manufacturing Co. 50,000 4,109,375
The Seagram Co., Ltd. 102,600 4,200,187
Tyco International Ltd. 115,584 7,281,792
US Industries, Inc. 192,200 4,756,950
-----------
42,535,303
-----------
DRUGS & HEALTH CARE (9.9%)
Alza Corp. (a) 84,100 3,637,325
American Home Products Corp. 276,200 14,293,350
Bristol-Myers Squibb Co. 46,400 5,333,100
Columbia/HCA Healthcare Corp. 149,100 4,342,537
Crescendo Pharmaceuticals
Corp. (a) 4,150 52,653
DENTSPLY International, Inc. 105,700 2,635,894
Dura Pharmaceuticals, Inc. (a) 125,200 2,801,350
Elan Corp. ADR (a) 13,700 8,469,956
Eli Lilly & Co. 113,000 7,472,125
Genzyme Corp. (a) 145,900 3,729,569
HEALTHSOUTH Corp. (a) 18,200 4,953,562
Henry Shein, Inc. (a) 107,500 4,958,437
Humana, Inc. (a) 212,000 6,611,750
Merck & Co., Inc. 32,500 4,346,875
Omnicare, Inc. 115,500 4,403,437
Pfizer, Inc. 75,300 8,184,169
Quorum Health Group, Inc. (a) 129,800 3,439,700
R. P. Scherer Corp. (a) 54,600 4,838,925
SmithKline Beecham PLC ADR 132,600 8,022,300
Steris Corp.(a) 122,000 7,758,444
Sybron International Corp. (a) 113,700 2,870,925
Tenet Healthcare Corp. (a) 222,300 6,946,875
United Healthcare Corp. 86,700 5,505,450
Warner-Lambert Co. 82,800 5,744,250
-----------
131,352,958
-----------
ELECTRIC & GAS UTILITIES (2.0%)
Central & South West Corp. 93,000 2,499,375
Columbia Energy Group 23,400 1,301,625
Dominion Resources, Inc. 59,800 2,440,587
Florida Progress Corp. 93,000 3,824,625
Houston Industries, Inc. 261,500 8,073,812
MarketSpan Corp. 118,008 3,532,865
P G & E Corp. 121,000 3,819,062
Texas Utilities Co. 28,900 1,202,963
-----------
26,694,914
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT (3.4%)
Arrow Electronics, Inc. (a) 270,000 $ 5,872,500
Berg Electronics Corp. (a) 147,900 2,893,294
General Semiconductor, Inc. (a) 16,500 162,938
Intel Corp. 100,000 7,412,500
International Game Technology 152,700 3,702,975
Linear Technology Corp. 89,500 5,397,969
Molex, Inc. 150,275 3,756,875
Motorola, Inc. 55,900 2,938,244
Perkin-Elmer Corp. 41,500 2,580,781
Sensormatic Electronics Corp. 153,400 2,147,600
Sony Corp. 93,500 8,046,844
-----------
44,912,520
-----------
FINANCIAL SERVICES (6.4%)
Associates First Capital Corp. 33,800 2,598,375
Capital One Financial Corp. 7,200 894,150
Countrywide Credit Industries, Inc 150,000 7,612,500
Federal Home Loan Mortgage Corp 300,000 14,118,750
Federal National Mortgage Co. 98,800 6,002,100
Morgan Stanley Dean Witter & Co. 125,000 11,421,875
Paychex, Inc. 223,200 9,081,450
SLM Holding Corp. 266,700 13,068,300
Travelers Group, Inc. 327,900 19,878,937
-----------
84,676,437
-----------
FOOD, BEVERAGE & RESTAURANTS (4.7%)
Agribrands International, Inc. (a) 4,670 141,267
Anheuser Busch, Inc. 252,700 11,924,281
Campbell Soup Co. 137,400 7,299,375
Diageo PLC ADR 110,000 5,300,625
Dole Food Co. 150,000 7,453,125
Dreyers Grand Ice Cream 272,500 5,484,063
General Mills, Inc. 49,200 3,364,050
International Home Foods, Inc. (a) 150,300 3,419,325
PepsiCo, Inc. 86,300 3,554,481
Starbucks Corp. (a) 201,700 10,778,344
Whole Foods Market, Inc. (a) 66,700 4,035,350
-----------
62,754,286
-----------
HOTELS & ENTERTAINMENT / LEISURE (0.7%)
Marriott International, Inc.,
Class A 160,900 5,209,137
Time Warner, Inc. 45,500 3,887,406
-----------
9,096,543
-----------
INDUSTRIAL EQUIPMENT (2.3%)
Caterpillar, Inc. 130,000 6,873,750
Deere & Co. 136,800 7,147,800
Dover Corp. 100,000 3,425,000
Fastenal Co. (a) 130,100 6,049,650
MSC Industrial Direct Co., Inc. (a) 263,400 7,506,900
-----------
31,003,100
-----------
See Notes to Schedule of Investments. 13
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT.) SHARES MARKET VALUE
INSURANCE (7.2%)
ACE Limited 189,100 $ 7,374,900
AFLAC, Inc. 400,000 12,125,000
Allmerica Financial Corp. 100,500 6,532,500
Ambac Financial Group, Inc. 44,100 2,579,850
American International Group, Inc. 9,800 1,430,800
CIGNA Corp. 104,700 7,224,300
Conseco, Inc. 232,400 10,864,700
EXEL Limited 220,000 17,118,750
Hartford Financial Services
Group, Inc. 54,800 6,267,750
Marsh & McLennan Companies, Inc. 62,100 3,753,169
Progressive Corp. 70,000 9,870,000
Transamerica Corp. 85,000 9,785,625
-----------
94,927,344
-----------
METALS & MINING (1.5%)
Allegheny Teledyne, Inc. 166,000 3,797,250
Aluminum Company of America 99,600 6,567,375
British Steel PLC ADR 290,000 6,597,500
Freeport-McMoRan Copper &
Gold, Inc., Class A 185,000 2,809,687
-----------
19,771,812
-----------
OIL & GAS (4.6%)
Atlantic Richfield Co. 64,400 5,031,250
Baker Hughes, Inc. 185,700 6,418,256
Burlington Resources, Inc. 89,300 3,845,481
Cooper Cameron Corp. (a) 36,500 1,888,875
ELF Aquitaine ADR 116,200 8,250,200
Exxon Corp. 75,300 5,369,831
Mobil Corp. 110,000 8,428,750
Phillips Petroleum Co. 52,600 2,534,662
Schlumberger Ltd. 24,100 1,646,331
Texaco, Inc. 61,000 3,640,937
Tosco Corp. 329,700 9,684,937
USX-Marathon Group 120,000 4,117,500
-----------
60,857,010
-----------
PAPER (1.7%)
Champion International Corp. 120,000 5,902,500
Fort James Corp. 204,800 9,113,600
Georgia Pacific Corp. 11,400 671,887
MacMillan Bloedel Ltd. 292,700 3,109,938
Temple-Inland, Inc. 74,400 4,008,300
-----------
22,806,225
-----------
POLLUTION CONTROL (1.2%)
U.S.A. Waste Services, Inc. (a) 220,800 10,902,000
Waste Management, Inc. 155,800 5,453,000
-----------
16,355,000
-----------
PUBLISHING (0.4%)
R.R. Donnelley & Sons Co. 120,000 5,490,000
-----------
REAL ESTATE INVESTMENT TRUSTS (1.6%)
Crescent Real Estate Equities Co. 112,900 $ 3,796,262
Equity Office Properties Trust 75,377 2,138,822
Patriot American Hospitality, Inc. 154,300 3,693,556
Starwood Hotels & Resorts 174,500 8,430,531
Vornado Realty Trust 95,800 3,802,062
-----------
21,861,233
-----------
RETAIL TRADE (8.3%)
AnnTaylor Stores Corp. (a) 163,700 3,468,394
CDW Computer Centers, Inc. (a) 74,800 3,740,000
Circuit City Stores, Inc. 105,100 4,926,562
CVS Corp. 319,750 12,450,266
Dollar General Corp. 126,250 4,994,766
Family Dollar Stores, Inc. 250,500 4,618,594
Federated Department
Stores, Inc. (a) 251,700 13,544,606
Fred Meyer, Inc. (a) 144,090 6,123,825
Harcourt General, Inc. 76,900 4,575,550
Home Depot, Inc. 75,750 6,291,984
Kmart Corp. 435,100 8,375,675
Kohl's Corp. (a) 143,100 7,423,312
May Department Stores Co. 150,000 9,825,000
Safeway, Inc. (a) 86,300 3,511,331
Staples, Inc. (a) 310,450 8,983,647
Walgreen Co. 147,000 6,072,937
Wal-Mart Stores, Inc. 24,000 1,458,000
-----------
110,384,449
-----------
TELECOMMUNICATIONS (5.9%)
AT&T Corp. 190,600 10,888,025
Bell Atlantic Corp. 155,200 7,081,000
GTE Corp. 177,400 9,867,878
MCI Communications Corp. 127,300 7,399,312
MediaOne Group, Inc. 71,900 3,159,106
SBC Communications, Inc. 295,700 11,828,000
Sprint Corp. 229,300 16,165,650
US West Media Group (a) 1,964 92,289
WorldCom, Inc. (a) 235,300 11,397,344
-----------
77,878,604
-----------
TRANSPORTATION (2.0%)
AMR Corp. (a) 140,000 11,655,000
CSX Corp. 33,400 1,519,700
Delta Air Lines, Inc. 64,100 8,284,925
Union Pacific Corp. 106,400 4,694,900
-----------
26,154,525
-----------
TOTAL COMMON STOCKS
(Cost $952,901,775) 1,313,948,278
-------------
</TABLE>
14 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK (0.3%) SHARES MARKET VALUE
ELECTRIC UTILITIES (0.3%)
<S> <C> <C>
Houston Industries 7% Convertible 51,200 $ 3,814,400
------------
(Cost $2,877,586)
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (1.8%) INTEREST MATURITY PAR
RATE DATE VALUE
COMMERCIAL PAPER (0.3%) ------- -------- -----
<S> <C> <C> <C> <C>
Merrill Lynch 5.54% 07/02/98 $1,500,000 1,499,769
Merrill Lynch 5.55 07/07/98 2,000,000 1,998,123
---------
TOTAL COMMERCIAL PAPER (COST $3,497,892) 3,497,892
---------
</TABLE>
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT (1.5%)
<S> <C> <C>
ABN AMRO Chicago Corp., Repurchase Agreement dated
6/30/98, 6.10% to be repurchased at $20,061,399 on
7/1/98, collateralized by U.S. Treasury Notes and
Treasury Bill with various maturities to 2027, with
a current market value of $20,492,483. 20,058,000 20,058,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $23,555,892) 23,555,892
--------------
TOTAL INVESTMENTS (101.0%) (COST $979,335,253) (b) 1,341,318,570
-------------
OTHER ASSETS AND LIABILITIES, NET (-1.0%) (13,433,857)
--------------
NET ASSETS (100.0%) $1,327,884,713
--------------
NET ASSET VALUE PER SHARE (92,108,903 SHARES OUTSTANDING) $14.42
--------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) The cost of investments for federal income tax purposes is $981,216,190.
Gross unrealized appreciation and depreciation of investments at June 30,
1998, is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $389,579,938
Gross unrealized depreciation (29,477,558)
------------
Net unrealized appreciation $360,102,380
------------
</TABLE>
Acronym Name
------- ---------------------------
ADR American Depository Receipt
See Notes to Financial Statements. 15
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments at market value (identified cost $979,335,253) $ 1,341,318,570
Receivable for investments sold 10,169,778
Dividends and interest receivable 1,222,679
Other assets 50,981
---------------
TOTAL ASSETS 1,352,762,008
---------------
LIABILITIES:
Payable for investments purchased 8,037,719
Distributions payable to shareholders 14,795,153
Payable due to custodian bank 875,081
Management fees payable 764,723
Administrative and bookkeeping fees payable 213,272
Accrued other expenses 191,347
---------------
TOTAL LIABILITIES 24,877,295
---------------
NET ASSETS $ 1,327,884,713
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares
of beneficial interest without par value
authorized, 92,108,903 shares outstanding) $ 871,350,601
Undistributed net investment income 2,452,367
Accumulated net realized gains on investments
less distributions 92,098,428
Net unrealized appreciation on investments 361,983,317
---------------
TOTAL NET ASSETS APPLICABLE
TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST
($14.42 PER SHARE) $ 1,327,884,713
================
</TABLE>
16 See Notes to Financial Statements.
<PAGE>
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Dividends $ 8,034,113
Interest 619,823
--------------
TOTAL INVESTMENT INCOME (NET OF
NONREBATABLE FOREIGN TAXES WITHHELD
AT SOURCE WHICH AMOUNTED TO $64,190) 8,653,936
EXPENSES:
Management fees $ 4,470,971
Administrative fee 1,117,609
Bookkeeping fee 130,729
Custodian and transfer agent fees 135,554
Proxy and shareholder communication expense 111,460
Printing expense 87,419
Legal and audit fees 48,506
Insurance expense 11,295
Trustees' fees and expense 23,685
Miscellaneous expense 64,341
---------------
TOTAL EXPENSES 6,201,569
--------------
NET INVESTMENT INCOME 2,452,367
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 603,190,673
Cost of investments sold 492,516,911
---------------
Net realized gains on investment transactions 110,673,762
Net unrealized appreciation on investments:
Beginning of period 307,707,988
End of period 361,983,317
---------------
Change in unrealized appreciation-- net 54,275,329
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 167,401,458
==============
</TABLE>
See Notes to Financial Statements. 17
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,452,367 $ 4,205,838
Net realized gain on investments
after provision for federal income tax 110,673,762 203,853,412
Change in unrealized appreciation -- net 54,275,329 16,879,396
-------------- --------------
Net increase in net assets resulting from operations 167,401,458 224,938,646
-------------- --------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (4,205,838)
Net realized gains on investment transactions (63,765,892) (107,028,243)
-------------- --------------
Total distributions (63,765,892) (111,234,081)
-------------- --------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions 73,910,464 48,707,853
-------------- --------------
Total increase in net assets 177,546,030 162,412,418
NET ASSETS:
Beginning of period 1,150,338,683 987,926,265
-------------- --------------
End of period (including undistributed net investment
income of $2,452,367 and $0, respectively) $1,327,884,713 $1,150,338,683
============== ==============
</TABLE>
18 See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
-------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.03 0.05 0.08 0.10 0.11 0.12
Net realized and unrealized
gains (losses) on investments 1.89 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 1.92 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 (0.72) (1.28) (1.10) (0.94) (0.52) (0.58)
capital gains
Returns of capital -- -- -- -- (0.36) (0.37)
-------- -------- -------- -------- -------- --------
Total Distributions (0.72) (1.33) (1.18) (1.04) (1.00) (1.07)
-------- -------- -------- -------- -------- --------
Change due to rights offering (b) (0.10) -- -- -- (0.05) (0.03)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 14.42 $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
======== ======== ======== ======== ======== ========
Per share market value
at end of period $ 13.750 $ 13.313 $ 11.250 $ 10.875 $ 8.500 $ 11.125
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 14.9% (d) 26.6% 21.7% 31.8% (0.8%) 8.8%
Based on market price 9.1% (d) 34.4% 16.2% 41.4% (14.9%) 12.7%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,328 $ 1,150 $ 988 $ 872 $ 710 $ 725
Ratio of expenses to average net assets 1.00% (e) 1.01% 1.03% 1.06% 1.07% 1.08%
Ratio of net investment income
to average net assets 0.39% (e) 0.38% 0.73% 0.92% 1.16% 1.08%
Portfolio turnover rate 39% (d) 99% 70% 54% 44% 72%
</TABLE>
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offering for shares at a price below net asset
value.
(c) Calculated assuming all distributions reinvested at the actual reinvestment
price and all primary rights exercised.
(d) Not annualized.
(e) Annualized.
See Notes to Financial Statements. 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
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 Trustees. Short-term instruments
maturing in more than 60 days for which market quotations are readily available
are valued at current market value. Short- term instruments with remaining
maturities of 60 days or less are valued at amortized cost, unless the 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. During the year ended December 31, 1997,
the Fund elected to retain a portion of its net realized long-term capital gains
amounting to $87,643,452 and 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 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.
NOTE 3. CAPITAL TRANSACTIONS-In a rights offering commencing March 23, 1998,
shareholders exercised rights to purchase 4,318,134 shares at $12.83 per share
for proceeds, net of expenses, of $55,166,659. During the six months ended June
30, 1998, and the year ended December 31, 1997, distributions in the amount of
$18,743,805 and $48,707,853, 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 1,427,100 and 3,656,443 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 six months ended June 30,
1998 were $480,912,403 and $498,434,402 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. 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.
20
<PAGE>
THREE LIBERTY ALL-STAR FUNDS / DISTRIBUTION POLICY / DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
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 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 NET ASSETS
FUND TICKER FUND AT 7/31/98
NAME TYPE SYMBOL OBJECTIVE (millions)
======================================================================================================
<S> <C> <C> <C> <C>
Liberty All-Star Closed-End USA Growth & Income $1,300
Equity Fund
Liberty All-Star Closed-End ASG Growth 196
Growth Fund, Inc.
Liberty All-Star Equity Open-End, -- Growth & Income 34
Fund, Variable Series 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
either of the closed-end funds. For the variable annuity fund, you may call
Keyport at 1-800-367-3653.
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 to the extent of such excess. The Fund
retained such excess gains in 1993, 1996 and 1997.
DIVIDEND REINVESTMENT PLAN
Through the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan, the
Fund's shareholders have the opportunity to have their dividends and
distributions automatically reinvested in additional shares of the Fund.
Participating shareholders have been rewarded as a result of the consistent
reinvestment of distributions. Each share of the Fund owned by shareholders who
have participated in the Dividend Reinvestment Program since the Fund began
operations in 1986 would have grown to 3.557 shares as of June 30, 1998, with a
total net asset value of $51.29. Shareholders are kept apprised of the status of
their account through quarterly statements.
For complete information and enrollment forms, please call Investor Assistance
toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM and 5 PM
Eastern time.
21
<PAGE>
1998 ANNUAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
1998 ANNUAL MEETING OF SHAREHOLDERS
Liberty All-Star Equity Fund's 1998 Annual Meeting of Shareholders was held on
April 22, 1998. At the meeting, Mr. Richard W. Lowry was reelected as Trustee of
the class whose term expires with the Annual Meeting in 2001, and Messrs.
William E. Mayer and John J. Neuhauser were elected for the first time as
Trustees of the class whose term expires with the Annual Meeting in 2000 and
2001, respectively. Messrs. Robert J. Birnbaum and James E. Grinnell continue in
office as Trustees. By vote of the Board of Trustees on June 18, 1998, Mr. John
V. Carberry was elected Chairman of the Board of Trustees effective June 30,
1998, to fill the vacancy created by the retirement of Harold W. Cogger.
In addition, shareholders approved the Fund's new Portfolio Management
Agreements with Oppenheimer Capital and Westwood Management Corporation, and
ratified the Board of Trustees' selection of KPMG Peat Marwick LLP as the Fund's
independent auditors for the year ending December 31, 1998. The number of votes
cast for and against and the number of abstentions on these matters were as
follows:
1. Approval of new Portfolio Management Agreement with Oppenheimer Capital.
For: 80,022,138
Against: 678,167
Abstain: 1,324,462
2. Approval of Portfolio Management Agreement with Westwood Management
Corporation.
For: 79,844,076
Against: 749,259
Abstain: 1,431,431
3. Ratification of selection of KPMG Peat Marwick LLP as Independent Auditors
for 1998.
For: 80,445,460
Against: 433,194
Abstain: 1,146,113
22
<PAGE>
NOTES
- --------------------------------------------------------------------------------
23
<PAGE>
[logo]
LIBERTY
ALL[star]STAR
- -------------
EQUITY FUND
New York Stock Exchange Trading Symbol: USA
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lamco.com
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110
CUSTODIAN
The Chase Manhattan Bank
270 Park Avenue
New York, NY10017-2070
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*
John V. Carberry
James E. Grinnell*
Richard W. Lowry*
William E. Mayer*
Dr. John J. Neuhauser*
OFFICERS
John V. Carberry, 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
J. Kevin Connaughton, 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
[type knocked out of photo of newspaper stock market page]
SEMI-
ANNUAL
REPORT
1998
[logo]
LIBERTY
ALL[star]STAR
- -------------
EQUITY FUND
