[front cover]
[magnified square of stock market report]
FIRST
QUARTER
REPORT
1998
[Liberty All*Star logo] LIBERTY
ALL*STAR
--------
EQUITY FUND
<PAGE>
CHAIRMAN'S LETTER
................................................................................
To Our Fellow Shareholders: May 1998
The net asset value (NAV) of a common share of the Fund rose from $13.32 on
December 31, 1997, to $14.80 on March 31, 1998, after deducting the distribution
of 35 cents declared during the quarter. The market price of a share of the Fund
traded in a range from $12.625 to $14.375 before closing the quarter at $14.25.
The ending price represented a discount to NAV of 3.7 percent compared with a
discount to NAV of 0.1 percent on December 31, 1997. Key investment results and
comparisons are noted below.
As the table shows, the Fund's net asset value increased 13.7 percent
during the first quarter, which compares with 11.6 percent for the Lipper Growth
& Income Mutual Fund Average (the Fund's primary benchmark) and 14.0 and 11.7
percent for the S&P 500 Stock Index and Dow Jones Industrial Average,
respectively. For the last 12 months, the Fund's net asset value was up 43.1
percent compared with 40.2 percent for the Lipper Growth & Income Mutual Fund
Average and 48.0 and 36.0 percent for the S&P 500 and Dow Jones, respectively.
The S&P 500 continued its advance for an unprecedented 13th quarter in a
row, ending the quarter at 1101.75 after reaching a new high of 1105.65 on March
24. Large capitalization stocks were the main contributors to this performance,
as they have been in eight of the past 10 quarters. Growth stocks rebounded
sharply from their fourth quarter sell-off, which provided a significant
reversal in style leadership going into the new year. Richard Christensen's
President's letter provides a comparison of style-based results for those two
quarters, which shows how quickly investor preferences can change.
I would like to welcome two new trustees to the board, William E. Mayer and
John J. Neuhauser, who were elected by shareholders at their recent meeting.
Richard W. Lowry, a trustee since the Fund's inception in 1986, was re-elected
for another three year term. All other trustees continue in office and all other
proposals placed before the meeting were also approved.
In April, Liberty Asset Management Company, the Fund Manager, recommended,
and the Board of Trustees approved, the hiring of a new Portfolio Manager,
Boston Partners Asset Management, L.P., to replace Palley-Needelman Asset
Management, Inc. effective May 11, 1998. Boston Partners, a value style manager,
invests in undervalued companies that have sound business fundamentals and
positive business momentum.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
First Quarter Latest 12 Months
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIBERTY ALL-STAR EQUITY FUND:
Shares Valued at Net Asset Value 13.7% 43.1%
Shares Valued at Market Price
With Dividends Reinvested 9.6% 37.5%
Fund's Closing Price Range $14.313 to $12.813 $14.625 to $11.50
Fund's (Discount)/Premium Range (5.6)% to 2.5% (5.8)% to 2.5%
Lipper Growth & Income Mutual Fund Average 11.6% 40.2%
S&P 500 Stock Index 14.0% 48.0%
Dow Jones Industrial Average 11.7% 36.0%
NASDAQ Composite Index 16.9% 50.3%
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>
1
<PAGE>
PRESIDENT'S LETTER
................................................................................
To Our Fellow Shareholders: May 1998
The Chairman's letter mentioned that, during the fourth quarter, when the
Asian financial crisis was very much on the minds of most investors, investor
preferences reversed the relative performance advantage that value stocks had
been enjoying. The chart below illustrates the style leadership reversal between
the fourth quarter of 1997 and the first quarter of this year by comparing the
difference in performance between the Russell 1000 growth and value indices. The
Russell 1000 comprises the largest 1,000 public companies in the United States.
LAMCO's investment process blends both value and growth styles in order to
mitigate the fluctuations in returns associated with such events.
Boston Partners Asset Management, L.P., the Fund's newest Portfolio
Manager, is based in Boston, Massachusetts, and has approximately $16 billion in
assets under management. Mark Donovan, Chairman of the firm's Equity Strategy
Committee, will manage their portion of the Fund. Boston Partners is a value
manager, investing in undervalued securities that generally have low
price-to-earnings and price-to-book ratios. It develops its own internal
fundamental research to identify a catalyst for positive change. In this way,
the firm attempts to avoid the "value trap" of investing in companies that
appear to be undervalued but languish because they lack prospects for future
improvement.
The Fund's portfolio management agreement with Boston Partners, which will
be submitted to shareholders for ratification at the 1999 Annual Meeting, is at
the same management fee rate and on substantially the same other terms and
conditions as the Fund's agreement with its other Portfolio Managers.
The rights offering of additional shares to shareholders was successfully
concluded in late April, being oversubscribed as were the previous three
offerings. A total of 4,318,134 shares (one share for each 20 held on the record
date) were issued at a price of $12.83 per share. This price was 95 percent of
the market price at the close of the New York Stock Exchange on April 28, 1998,
the pricing date.
Finally, I am pleased to report that Lipper Analytical Services, Inc. has
informed us that your Fund ranks number one among the five Growth & Income Funds
in the Lipper Closed-End Fund Performance Comparison Service for the 10-year
period ending December 31, 1997. The Fund has earned this award for the second
year in a row, which provides further confirmation of the benefits of Liberty
Asset Management Company's multi-management investment program for All-Star.
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
[typeset representation of bar chart]
VALUE VERSUS GROWTH
TOTAL RETURN DIFFERENCE
4Q97 3.0%
1Q98 -3.5%
[end bar chart]
2
<PAGE>
SHAREHOLDERS' INVESTMENT GROWTH AS OF MARCH 31, 1998
................................................................................
To evaluate your $63.26
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.
Additional Investments
Made Through Rights
Offerings
Net Asset Value of Shares
Acquired Through Dividend
Reinvestment
This is the net $14.80
asset value of one
share of All-Star as
of 3/31/98.
<TABLE>
<CAPTION>
Net Asset Additional
Value Shares Investments Made
Net Asset Value Acquired Through Through Rights
of One Share Dividend Reinvestment Rights Offerings
<S> <C> <C> <C>
Jan 87 $10.17 $10.17 $10.17
Feb 87 10.87 10.87 10.87
Mar 87 10.03 11.09 11.09
Apr 87 10.72 10.77 10.77
May 87 10.81 10.86 10.86
Jun 87 11.23 11.32 11.32
Jul 87 11.73 11.82 11.82
Aug 87 11.60 12.39 12.39
Sep 87 10.87 11.94 11.94
Oct 87 8.31 9.12 9.12
Nov 87 7.58 8.32 8.32
Dec 87 7.90 9.01 9.01
Jan 88 8.29 9.45 9.45
Feb 88 8.64 9.85 9.85
Mar 88 8.29 9.51 9.51
Apr 88 8.30 9.52 9.52
May 88 8.26 9.47 9.47
Jun 88 8.43 9.95 9.95
Jul 88 8.33 9.83 9.83
Aug 88 8.12 9.58 9.58
Sep 88 8.28 10.05 10.05
Oct 88 8.43 10.23 10.23
Nov 88 8.30 10.08 10.08
Dec 88 8.29 10.34 10.34
Jan 89 8.83 11.01 11.01
Feb 89 8.67 10.81 10.81
Mar 89 8.60 11.03 11.03
Apr 89 9.01 11.56 11.56
May 89 9.40 12.06 12.06
Jun 89 9.07 12.00 12.00
Jul 89 9.81 12.98 12.98
Aug 89 10.03 13.27 13.27
Sep 89 9.82 13.38 13.38
Oct 89 9.61 13.10 13.10
Nov 89 9.72 13.25 13.25
Dec 89 9.58 13.44 13.44
Jan 90 9.02 12.66 12.66
Feb 90 9.11 12.78 12.78
Mar 90 9.14 13.18 13.18
Apr 90 9.00 12.98 12.98
May 90 9.92 14.30 14.30
Jun 90 9.72 14.42 14.42
Jul 90 9.69 14.38 14.38
Aug 90 8.91 13.22 13.22
Sep 90 8.23 12.59 12.59
Oct 90 8.21 12.56 12.56
Nov 90 8.77 13.42 13.42
Dec 90 8.92 14.01 14.01
Jan 91 9.37 14.72 14.72
Feb 91 10.04 15.77 15.77
Mar 91 10.18 16.42 16.42
Apr 91 10.11 16.31 16.31
May 91 10.62 17.13 17.13
Jun 91 9.87 16.33 16.33
Jul 91 10.35 17.13 17.13
Aug 91 10.39 17.65 17.65
Sep 91 10.33 17.55 17.55
Oct 91 10.52 17.87 17.87
Nov 91 9.92 17.28 17.28
Dec 91 11.20 19.51 19.51
Jan 92 11.00 19.16 19.16
Feb 92 10.77 19.25 19.25
Mar 92 10.56 18.87 18.87
Apr 92 10.66 19.05 20.96
May 92 10.76 19.23 21.15
Jun 92 10.23 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 20.92 23.02
Feb 93 10.70 20.61 22.68
Mar 93 10.75 21.23 23.37
Apr 93 10.42 20.58 22.65
May 93 10.52 21.29 23.44
Jun 93 10.56 21.37 23.53
Jul 93 10.54 21.33 23.48
Aug 93 10.73 22.26 24.52
Sep 93 10.79 22.39 24.66
Oct 93 10.84 22.49 26.27
Nov 93 10.34 22.00 25.69
Dec 93 10.40 22.48 26.25
Jan 94 10.77 23.28 27.18
Feb 94 10.34 22.91 26.75
Mar 94 9.85 21.83 25.48
Apr 94 9.93 22.00 25.69
May 94 9.80 22.26 25.98
Jun 94 9.48 21.53 25.13
Jul 94 9.78 22.21 25.93
Aug 94 9.99 23.28 27.17
Sep 94 9.69 22.58 27.86
Oct 94 9.86 22.97 28.35
Nov 94 9.17 21.97 27.11
Dec 94 9.26 22.19 27.79
Jan 95 9.40 22.52 26.75
Feb 95 9.49 23.31 28.78
Mar 95 9.83 24.14 29.78
Apr 95 9.98 24.51 30.24
May 95 10.13 25.49 31.44
Jun 95 10.53 26.49 32.69
Jul 95 10.95 27.55 33.99
Aug 95 10.74 27.73 34.21
Sep 95 11.05 28.53 35.19
Oct 95 10.93 28.22 34.81
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 10.88 30.36 37.46
Aug 96 10.98 31.41 38.76
Sep 96 11.71 33.50 31.34
Oct 96 11.88 33.99 41.94
Nov 96 12.35 36.31 44.81
Dec 96 11.95 35.54 43.86
Jan 97 12.65 37.62 46.43
Feb 97 12.55 37.32 46.06
Mar 97 11.73 35.81 44.19
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 87 14.01 44.96 55.48
Oct 97 13.51 43.35 53.50
Nov 97 13.52 44.49 54.92
Dec 97 13.32 45.02 55.57
Jan 98 13.30 44.95 55.49
Feb 98 14.40 48.67 60.08
Mar 98 14.80 51.24 63.26
</TABLE>
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, through March 31, 1998
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 $63.26 (4.274 shares times the current $14.80 net asset value
per share) and a market price value of $60.90 (4.274 shares times the current
$14.25 market price per share). Excluding the rights offerings shares, an
original share has grown to 3.462 shares. Thus, the original share has grown to
a net asset value of $51.24 (3.462 shares times the current $14.80 net asset
value per share) and a market price value of $49.33 (3.462 shares times the
current $14.25 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 Price Total Market
Owned At Through Through Owned Per Share Total NAV Per Share Price Of
Beginning Per Share Reinvestment 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 .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 3.670 1.69(3) .502 -- 4.172 13.32 55.57 13.313 55.54
- -----------------------------------------------------------------------------------------------------------------------------------
1998
1st Quarter 4.172 0.35 .102 -- 4.274 14.80 63.26 14.25 60.90
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
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.
4
<PAGE>
PORTFOLIO MANAGERS / PORTFOLIO CHARACTERISTICS
................................................................................
THE FUND'S FIVE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE ARE:
PALLEY-NEEDELMAN ASSET MANAGEMENT, INC.*
Companies selling at a discount to the market with sound fundamentals and above
average dividend yield.
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 on this page is a regular feature of the
Fund's shareholder reports. It serves as a useful tool for understanding the
value of a multi-managed portfolio. The characteristics are different for each
of the Fund's five Portfolio Managers. These differences are a reflection of the
fact that each pursues a different Investment Style. The shaded column
highlights the characteristics of the Fund as a whole, while the final column
shows portfolio characteristics for the S&P 500 Stock Index.
PORTFOLIO CHARACTERISTICS INVESTMENT STYLE SPECTRUM
AS OF MARCH 31, 1998 [bar shaded from light to dark]
(UNAUDITED) VALUE GROWTH
<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 39 75 27 52 50 219 500
- ------------------------------------------------------------------------------------------------------------------------------------
Percent in Top 10 34% 24% 51% 31% 32% 13% 19%
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $28 $31 $38 $27 $19 $29 $64
- ------------------------------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth 10% 14% 19% 20% 30% 19% 17%
- ------------------------------------------------------------------------------------------------------------------------------------
Dividend Yield 1.6% 1.2% 1.1% 1.5% 0.2% 1.1% 1.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 21x 25x 21x 26x 39x 25x 25x
- ------------------------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 3.4x 3.8x 3.8x 4.6x 7.0x 4.5x 4.6x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Boston Partners Asset Management, L.P. replaced Palley-Needelman Asset
Management, Inc. effective May 11, 1998.
5
<PAGE>
TOP 50 HOLDINGS
................................................................................
<TABLE>
<CAPTION>
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
3/31/98 12/31/97 SECURITY NAME ($000) NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 3 SBC Communications, Inc. $21,298 1.7%
2 1 Boeing Co. 19,557 1.5
3 2 International Business Machines Corp. 18,749 1.5
4 4 First Union Corp. 18,512 1.4
5 5 EXEL Limited 17,050 1.3
6 8 Travelers Group, Inc. 16,602 1.3
7 9 Sprint Corp. 15,549 1.2
8 6 Federal Home Loan Mortgage Corp. 14,231 1.1
9 12 Citicorp 13,490 1.1
10 42 WorldCom, Inc. 12,824 1.0
11 15 Fleet Financial Group, Inc. 12,708 1.0
12 20 AFLAC,Inc. 12,650 1.0
13 17 Monsanto Co. 12,480 1.0
14 19 Providian Financial Corp. 11,476 0.9
15 10 HBO & Co. 11,344 0.9
16 27 Anheuser Busch, Inc. 11,031 0.9
17 25 Morgan Stanley, Dean Witter, Discover & Co. 10,931 0.9
18 18 Philip Morris Companies, Inc. 10,801 0.8
19 49 Nokia Corp. ADR 10,794 0.8
20 36 Avon Products, Inc. 10,530 0.8
21 38 GTECorp. 10,382 0.8
22 30 Ahmanson H.F. &Co. 10,331 0.8
23 24 General Electric Co. 10,328 0.8
24 11 Pfizer, Inc. 10,268 0.8
25 70 American Home Products Corp. 10,205 0.8
26 52 Starwood Hotels &Resorts 10,131 0.8
27 21 Progressive Corp. 10,102 0.8
28 23 AMRCorp. 10,023 0.8
29 29 Transamerica Corp. 9,903 0.8
30 7 May Department Stores Co. 9,525 0.7
31 28 AonCorp. 9,368 0.7
32 35 U.S. Bancorp 9,331 0.7
33 14 Warner-Lambert Co. 9,163 0.7
34 31 Automatic Data Processing, Inc. 9,080 0.7
35 67 Lucent Technologies, Inc. 9,041 0.7
36 84 Starbucks Corp. 8,931 0.7
37 26 Fiserv, Inc. 8,733 0.7
38 50 Schlumberger Ltd. 8,643 0.7
39 37 Paychex, Inc. 8,403 0.7
40 33 Elan Corp. ADR 8,291 0.6
41 78 Conseco, Inc. 8,233 0.6
42 61 Countrywide Credit Industries, Inc. 7,978 0.6
43 22 Duke Energy Corp. 7,919 0.6
44 48 Intel Corp. 7,800 0.6
45 46 Beneficial Corp. 7,770 0.6
46 64 Cigna Corp. 7,565 0.6
47 56 ELFAquitaine ADR 7,524 0.6
48 86 Bell Atlantic Corp. 7,483 0.6
49 75 Cintas Corp. 7,436 0.6
50 32 Arrow Electronics, Inc. 7,307 0.6
</TABLE>
6
<PAGE>
MAJOR STOCK CHANGES IN THE FIRST 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
first quarter of 1998.
<TABLE>
<CAPTION>
SHARES
----------------------------------------------
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 3/31/98
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
AT&T Corp. 97,800 97,800
Baker Hughes, Inc. 178,100 178,000
Kohl's Corp. 67,500 67,500
Nordstrom, Inc. 110,800 110,800
Sherwin-Williams Co. 141,700 141,700
SLM Holding Corp. 100,000 100,000
E.I. du Pont de Nemours & Co. (95,000) 0
General Motors Corp. (123,500) 0
HBO & Co. (87,300) 187,900
May Department Stores Co. (112,000) 150,000
Medtronic, Inc. (98,200) 43,300
Mobil Corp. (94,300) 76,100
Pfizer, Inc. (67,400) 103,000
Scientific Atlanta, Inc. (332,000) 0
Texaco, Inc. (116,400) 86,000
Triton Energy Corp. (154,200) 15,800
TRW, Inc. (81,300) 0
Union Pacific Corp. (119,400) 0
Warner-Lambert Co. (45,000) 53,800
Xerox Corp. (43,600) 61,600
</TABLE>
7
<PAGE>
MANAGER INTERVIEW
................................................................................
[photo of Susan M. Byrne] SUSAN M. BYRNE
Westwood Management
Corporation
Manager Interview: A Disciple of Disciplined Growth Seeks to Discern Change
Before Others Do for the Best of Upside Potential and Downside Protection.
Westwood Management Corporation is relatively new as one of All-Star's five
portfolio management firms, having been named to the All-Star team last
November. 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. We recently had the opportunity to
visit with Susan M. Byrne, who founded the firm and today serves as
Westwood's President and Chief Investment Officer.
- --------------------------------------------------------------------------------
The views expressed in this interview represent the manager's views at the
time of the discussion and are subject to change.
- --------------------------------------------------------------------------------
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.
BYRNE: This is an appropriate time for that question, as Westwood celebrated its
15-year anniversary on April 1. I started the firm in 1983 in New York City. I
was very conscious of the fact that it was April Fool's Day and I was starting
out on my own in the great American dream. But it has worked out very well. We
have about $2 billion under management, which includes both equities and fixed
income. We have a range of products, including what we call our fully invested
equity approach, and that's the portfolio I manage for Liberty All-Star Equity
Fund. About six years ago I moved my office to Dallas, but we still maintain a
New York office. Counting our second Dallas office, among the three locations we
have 45 employees -- and tons of computers. We recently had a power surge that
knocked out one of our servers for the better part of a day. It served to remind
me of the days when I started in the investment industry 28 years ago -- when
calculators were considered high tech.
LAMCO: Let's shift a little and take a look at some of the broad factors that
characterize Westwood Management's investment philosophy, objectives and style,
as well as investment approach and process.
BYRNE: I would characterize our style as disciplined growth. By that, I mean
that we employ a rather rigorous fundamental process that tells us how much
money we would pay for a certain amount of growth. Essentially, we are looking
for undiscovered growth, or what you could call "unpopular growth." In other
words, companies where investors' confidence level is fairly low as
characterized by a price/earnings ratio that's at a discount to what we perceive
the company's future growth rate to be. What we seek is a change in the growth
rate of a company because of a new product or service, a management change or a
restructuring -- a factor that is going to cause the growth to ratchet up to a
higher level.
We can follow a couple of paths in implementing that approach. We could
purchase a growth company that sort of lost its way until new management came in
and restructured it. IBM, which we have held for the past three years, is an
example. Or we could focus on a company where our perception of the future
growth rate is much higher than that of the market overall. An example here
would be Lucent Technologies. A number of people felt that the price/earnings
ratio was extremely high for a company that was just an OK grower. For a number
of reasons, we felt that Lucent was going to grow in excess of 30 percent, and
thus far the market has confirmed our feeling.
On the other hand, a name that we had owned for three years and were forced
to sell even though its price has continued to go up is Dell Computer. We had a
spectacular run after
8
<PAGE>
MANAGER INTERVIEW
................................................................................
buying the stock at 10 times earnings. When the price/earnings ratio reached 35
times the next year's projected earnings, the stock no longer qualified for our
disciplined growth approach. So, we moved on and redeployed the money elsewhere.
LAMCO: So, as distinct, for example, from a momentum style investor, you like to
arrive at the party a little early and acquire earnings growth at what you see
as an attractive level?
BYRNE: Exactly. A momentum investor will look at accelerating earnings and
accelerating price -- everyone has a slightly different combination. We do not
look at price momentum at all. We're perfectly happy if our companies get picked
up by investors, but we feel that those who only look at price momentum often
take certain stocks to excess and we leave them behind at that point.
LAMCO: It sounds like it's very much a bottom-up approach. Do you also consider
some macro issues?
BYRNE: We do, but largely because we're very interested in controlling overall
portfolio risk. Our stock selection process is very much a bottom-up,
fundamental approach. From an overall portfolio viewpoint, we have liked the
telecommunications area for some time. Obviously, we're not going to create an
entire portfolio made up of telecommunications stocks, but we are going to
create a portfolio that represents our best ideas in that industry. We want a
diversified portfolio for the risk reduction benefits it provides. On the other
hand, we manage a fairly concentrated portfolio. So it is diversified, but also
somewhat concentrated. We have our best bets in the portfolio and that's how we
try and pick the stocks to get ahead.
[begin callout]
"Essentially, we are looking for undiscovered growth, or what you could call
'unpopular growth.' In other words, companies where investors' confidence level
is fairly low..."
[end callout]
LAMCO: On the subject of the portfolio construction, what sectors do you like?
BYRNE: As a subset of the technology sector, we're strong on telecommunications.
We have been very high on companies that benefit either from software or
hardware advances in telecommunications. We would broaden that to include some
of the telephone companies in which we have been invested. Few investors look at
a Bell Atlantic as a growth company. But when we looked out three years at what
was happening with the Internet and wire to the home, we felt that these
companies could grow at a rate two to three times their historic rate. There are
some wonderful growth companies out there, like a Microsoft or a Coca-Cola. But
everybody knows they're great growth companies and their valuations indicate as
much. There's no new news there. But if an 8 to 10 percent grower can accelerate
to a 15 to 20 percent or more grower, you can make some very nice money over a
three-year cycle.
[begin callout]
"We want a diversified portfolio for the risk reduction benefits it provides. On
the other hand, we manage a fairly concentrated portfolio. So it is diversified,
but also somewhat concentrated."
[end callout]
LAMCO: Would you say that three years is your typical time horizon?
BYRNE: Yes, that's about right. Another factor to consider is that with the tax
laws the way they are right now for capital gains, if you hold stocks for less
than 18 months you trigger a higher tax rate. Chasing the hot group this month
and shifting to something else next month is not very good investing from the
viewpoint of giving your investors any kind of tax-advantaged returns.
LAMCO: How about your sell discipline -- you mentioned being "forced" to sell
Dell Computer. How does it work?
BYRNE: There's a number of ways that a stock can be sold. There's the happy way,
which is you bought it, you were right, the stock performed very well over a few
years and you sold it when it reached your price target. The price target might
be a price/earnings ratio that's 10 percent above the growth rate, for example.
When this happens, we would consider the stock fully valued. A second way
involves an event that causes us to reevaluate the stock. When a stock gets
within 10 percent of the price target, we reevaluate it. We look to see if
there's anything we're missing or if the sales or earnings growth rate is likely
to go higher than we originally thought. If nothing has changed, the stock will
be sold when it reaches its target. If
9
<PAGE>
MANAGER INTERVIEW
................................................................................
management reports a poor quarter, we will also reevaluate the stock to
determine whether it was a one-time difficulty. Because we own our stocks for a
long time, we tend to know the management very well. If there's been a downward
change in the fundamentals, the stock will be sold. The third way a stock could
be sold would be the case of a brand new position. This is a big deal for
Westwood because, if we're right, we hope we're going to be able to own our
newly purchased stock for a long time. But, if on a brand new position, a stock
moves against us and falls by 15 percent or more it will be sold automatically
under normal market conditions.
LAMCO: Would it be correct to assume that if the 8 to 12 percent grower you
mentioned a question or so ago continues to be just an 8 percent grower, or
maybe slips, you'll reevaluate it?
BYRNE: We would reevaluate it. However, the beauty of it, at least from our
viewpoint, is that if it continues to be an 8 percent grower and we are wrong,
then the stock is priced correctly and everybody else was right. Just like Bell
Atlantic. If, indeed, it was going to be an 8 to 10 percent grower, the stock
would have stayed at $50. But the growth rate accelerated and we think it will
accelerate even more in the future. The stock has doubled in a year. People are
shocked. If it had only been an 8 to 10 percent grower, we would have had an
opportunity cost at most.
LAMCO: In other words, you didn't have much downside risk -- worst case, as you
say, it would have been an opportunity cost.
BYRNE: Yes, we like to control downside risk because we're after consistent,
long-term results. If you can avoid the blow-ups, you don't need to swing for
the fences every time you're at bat.
LAMCO: If you had to single out any one truly differentiating or distinguishing
characteristic of the firm, what would it be?
BYRNE: I would say that the soul of the firm is the courage not to go with the
crowd and to be deeply fearful of losing people's money. That leads us to impose
a strict discipline on our growth outlook. We have a point of view that holds
that equities are a long-term investment vehicle. People should only have their
money in equities if they're trying to do something that's going to happen years
in the future. We try to manage the money so that at the end of that period we
will have produced a superior rate of return by being very consistent and very
disciplined while taking less risk than others do. We will have made good money
for people by finding diamonds in the rough and holding on to them.
[begin callout]
"I would say that the soul of the firm is the courage not to go with the crowd
and to be deeply fearful of losing people's money."
[end callout]
LAMCO: Give us a look at how you've invested the portion of the Fund under your
management. As you assumed responsibilities in November of last year, let's
focus on stocks that you've bought. Can you tell us about a few and the
rationale for each?
BYRNE: I mentioned Lucent Technologies. It was spun-off from AT&T and on its own
has been a terrific stock. Lucent is pretty much on the cutting edge of
technology for all of the telephone companies as people begin to use the
Internet for commercial applications. Lucent is one of several stocks we hold
that are benefiting from the upgrade of infrastructure and the competition for
the consumer in the emerging area of Internet commerce. Lucent is benefiting in
a very direct and pure way because it makes the equipment and software used in
Internet applications. And the company has pretty much won every major contract
negotiation it has participated in. We have felt that the company was a 30
percent grower and could be accelerating in its growth rate. As it is still
selling under 30 times estimated 1999 earnings, we're continuing to hold it.
A smaller cap stock that we own actually used to be one company and is now
two companies. One is called Sterling Commerce and the other is Sterling
Software. Sterling Commerce makes software for electronic data interchange, or
"EDI." This is software that allows computers that speak different languages to
communicate with each other to transmit, for example, purchase orders, invoices
and other business documents. It's a very important technology and Sterling
Commerce has a key security strategy by providing fire walls that protect
documents from outside intrusion. Its big brother is Sterling Software, which is
in the process of transforming itself. It spun-off Sterling Commerce in a
tax-free transaction. It had an enormous amount of cash and bought the
application software division of Texas Instruments. TI's application software
makes it considerably easier for programmers to perform reprogramming.
Application software is a pretty hot area today,
10
<PAGE>
MANAGER INTERVIEW
...............................................................................
but is probably the least understood and least recognized area of software.
Therefore, even though we expect it to grow 25-30 percent, Sterling Software is
selling at less than 20 times next year's earnings. We think this stock could be
a nice double over an 18-month time frame.
A fourth stock that we like is the seemingly boring name of IBM. The
company's services business is benefiting from the outsourcing trend and the
money that's being spent on Year 2000 solutions. Not only are we high on IBM's
services capabilities, I think people misunderstand that mainframes are not
going away. As a matter of fact, with the use of the Internet and intranets
soaring, the mainframe should prosper because it's well-suited for these
applications. We have IBM selling for 13 times 1999 earnings -- a screaming
discount, in our view.
[begin callout]
"Stock picking happens two ways, but most people think about it in only one way,
and that's buying a stock. But when you manage a portfolio, the biggest
decisions you're making are about which stocks to avoid."
[end callout]
We also like WorldCom. We're high on WorldCom's acquisition of MCI. Once
the deal is complete, about 40 percent of all Internet commerce will go through
a WorldCom hub. This hasn't gone unnoticed by the Justice Department, but I
don't think they're going to block the transaction. I think the stock may not do
much until later in the year, but when the MCI deal is finalized, I believe it
will really take off.
Another stock we like is Tenet Healthcare. Its biggest competitor was
Columbia/HCA, which is now embroiled in a wide range of legal and other
problems. Tenet has come out smelling like a rose. The company has always had
solid professional practices, sound finances and has been able to continue to
acquire hospitals. We have Tenet as a 20 percent-plus grower that's selling at
16 times '99 earnings. So, it's still selling at a discount to the growth rate.
LAMCO: Thank you. Perhaps we could wrap up by asking you about your thoughts
concerning the stock market. You have said before that you think the key to this
market is stock picking.
BYRNE: Yes. Stock picking happens two ways, but most people think about it in
only one way, and that's buying a stock. But when you manage a portfolio, the
biggest decisions you're making are about which stocks to avoid. In that sense,
stock picking is extremely important because I do think that there are going to
be surprises and I think it won't be until the second half when we get the full
impact of the Asian meltdown. I was in Asia in January, and my own feeling is
that it's going to be some time before that all gets worked out.
If there's anything I'd be wary of as time goes on, it would be an increase
in interest rates. We're already seeing it in the U.K., where interest rates
have gone up several times. If the United States stays very strong, we might see
rates tick up. But, fundamentally, the basic building blocks for an excellent
outlook for financial assets remain in place, namely, positive corporate
profits, low inflation and a huge but under-invested and under-saved demographic
cohort. I don't see a serious challenge to that combination.
11
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
COMMON STOCKS (98.6%) SHARES MARKET VALUE
<S> <C> <C>
AEROSPACE (2.1%)
Boeing Co. 375,200 $ 19,557,300
Lockheed Martin Corp. 59,000 6,637,500
------------
26,194,800
------------
AUTO, TIRES & ACCESSORIES (0.6%)
Chrysler Corp. 88,000 3,668,500
Lear Corp.(a) 66,700 3,760,212
------------
7,428,712
------------
BANKS (6.5%)
ABN AMRO Holding NV ADR 136,200 3,175,163
Ahmanson H.F. & Co. 133,300 10,330,750
Chase Manhattan Corp. 26,600 3,587,675
Citicorp 95,000 13,490,000
First of America Bank Co. 46,000 3,979,000
First Union Corp. 326,200 18,511,850
Fleet Financial Group, Inc. 149,400 12,708,337
U.S. Bancorp 74,800 9,331,300
Washington Mutual, Inc. 37,400 2,682,281
Wells Fargo & Co. 17,000 5,631,250
------------
83,427,606
------------
BUSINESS SERVICES (2.3%)
America Online, Inc. (a) 71,600 4,891,175
Catalina Marketing Corp. (a) 72,600 3,820,575
Cintas Corp. 143,700 7,436,475
Robert Half International, Inc. (a) 137,800 6,614,400
SITEL Corp. (a) 519,700 6,626,175
Sodexho Marriott Services, Inc. 12,400 329,375
------------
29,718,175
------------
CHEMICALS (2.7%)
Albemarle Corp. 57,600 1,454,400
Dow Chemical Co. 12,400 1,204,350
Monsanto Co. 240,000 12,480,000
Morton International, Inc. 176,900 5,804,531
Praxair, Inc. 125,200 6,439,975
Sherwin-Williams Co. 141,700 5,030,350
Union Carbide Corp. 50,900 2,551,362
------------
34,964,968
------------
COMMUNICATIONS EQUIPMENT (2.7%)
Brightpoint, Inc. (a) 189,800 3,262,188
Cisco Systems, Inc. (a) 101,450 6,936,644
CommScope, Inc. (a) 56,033 808,977
General Instruments Corp. (a) 168,000 3,517,500
Lucent Technologies, Inc. 70,700 9,040,763
Nokia Corp. ADR 100,000 10,793,750
------------
34,359,822
------------
COMPUTER & BUSINESS EQUIPMENT (4.6%)
Anixter International, Inc. (a) 59,300 1,093,344
Bay Networks, Inc. (a) 153,600 4,166,400
SHARES MARKET VALUE
COMPUTER & BUSINESS EQUIPMENT (CONT.)
Cabletron Systems, Inc. (a) 76,800 $ 1,118,400
EMC Corp. (a) 117,500 4,442,969
Hewlett-Packard Co. 51,000 3,235,312
Ingram Micro, Inc., Class A (a) 160,800 5,969,700
International Business
Machines Corp. 180,500 18,749,437
Saville Systems Ireland
PLC ADR (a) 92,400 4,735,500
Sun Microsystems, Inc. (a) 103,000 4,297,031
Tech Data Corp. (a) 115,300 4,439,050
Xerox Corp. 61,600 6,556,550
------------
58,803,693
------------
COMPUTER SERVICES & SOFTWARE (5.7%)
Acxiom Corp. (a) 211,100 5,409,437
Autodesk, Inc. 67,400 2,906,625
Automatic Data Processing, Inc. 133,400 9,079,537
Concord EFS, Inc. (a) 128,300 4,434,369
Electronic Arts, Inc. (a) 59,300 2,783,394
Fiserv, Inc. (a) 137,800 8,733,075
HBO & Co. 187,900 11,344,462
HNC Software (a) 81,600 3,070,200
J.D. Edwards & Co. (a) 66,400 2,162,150
Microsoft Corp. (a) 66,700 5,965,481
Oracle Corp. (a) 100,450 3,170,453
Policy Management Systems (a) 48,400 3,887,125
Sterling Commerce, Inc. (a) 77,900 3,612,612
Sterling Software, Inc. (a) 117,700 6,650,050
------------
73,208,970
------------
CONSTRUCTION (0.8%)
Foster Wheeler Corp. 153,800 4,700,513
Masco Corp. 99,700 5,932,150
------------
10,632,663
------------
CONSUMER PRODUCTS (1.9%)
Hasbro, Inc. 65,800 2,319,450
Philip Morris Companies, Inc. 259,100 10,801,231
Procter & Gamble Co. 44,000 3,712,500
Ralston-Ralston Purina Group 46,700 4,953,119
Unilever NV ADR 43,800 3,003,038
------------
24,789,338
------------
COSMETICS & TOILETRIES (1.0%)
Avon Products, Inc. 135,000 10,530,000
Gillette Co. 21,900 2,599,256
------------
13,129,256
------------
DIVERSIFIED (3.3%)
Allied Signal, Inc. 83,900 3,523,800
Cooper Industries, Inc. 78,700 4,677,731
Eaton Corp. 70,400 6,701,200
General Electric Co. 120,000 10,327,500
</TABLE>
12 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
DIVERSIFIED (CONT.)
Loews Corp. 67,700 $ 7,057,725
The Seagram Co., Ltd. 102,600 3,918,038
Tyco International Ltd. 115,584 6,313,776
------------
42,519,770
------------
DRUGS & HEALTH CARE (9.3%)
Alza Corp. (a) 84,100 3,768,731
American Home Products Corp. 107,000 10,205,125
Bristol-Myers Squibb Co. 32,500 3,390,156
Crescendo Pharmaceuticals
Corp. (a) 4,150 52,394
DENTSPLY International, Inc. 102,600 3,199,838
Dura Pharmaceuticals, Inc. (a) 120,800 2,974,700
Elan Corp. ADR (a) 128,300 8,291,387
Eli Lilly & Co. 113,000 6,737,625
Forest Laboratories, Inc. (a) 55,400 2,077,500
Genzyme Corp. (a) 109,800 3,513,600
HEALTHSOUTH Corp. (a) 177,500 4,981,094
Henry Shein, Inc. (a) 107,500 4,461,250
Humana, Inc. (a) 212,000 5,260,250
Medtronic, Inc. 43,300 2,246,187
Merck & Co., Inc. 29,500 3,787,062
Omnicare, Inc. 112,100 4,441,963
Pfizer, Inc. 103,000 10,267,813
R.P. Scherer Corp. (a) 54,600 3,685,500
SmithKline Beecham PLC ADR 111,000 6,944,438
Steris Corp. (a) 118,500 6,399,000
Tenet Healthcare Corp. (a) 187,300 6,801,331
United Healthcare Corp. 86,700 5,613,825
Warner-Lambert Co. 53,800 9,162,812
------------
118,263,581
------------
ELECTRIC & GAS UTILITIES (2.1%)
Columbia Energy Group 15,600 1,212,900
Dominion Resources, Inc. 59,800 2,511,600
Duke Energy Corp. 132,955 7,919,132
Florida Progress Corp. 83,000 3,460,063
Houston Industries, Inc. 245,000 7,043,750
P G & E Corp. 69,000 2,277,000
Southern Co. 65,000 1,799,688
Texas Utilities Co. 28,900 1,136,131
------------
27,360,264
------------
ELECTRONICS & ELECTRICAL EQUIPMENT (4.2%)
Arrow Electronics, Inc. (a) 270,000 7,306,875
Berg Electronics Corp. (a) 129,200 3,294,600
General Semiconductor, Inc. (a) 42,025 501,674
Input/Output, Inc. (a) 61,500 1,437,563
Intel Corp. 100,000 7,800,000
International Game Technology 152,700 3,827,044
Linear Technology Corp. 86,400 5,961,600
Molex, Inc. 146,475 4,037,217
Motorola, Inc. 55,900 3,388,938
SHARES MARKET VALUE
ELECTRONICS & ELECTRICAL EQUIPMENT (CONT.)
Perkin-Elmer Corp. 41,500 $ 3,000,969
Raychem Corp. 82,000 3,408,125
Raytheon Co., Class A 9,195 522,966
Raytheon Co., Class B 104,100 6,076,837
Sensormatic Electronics Corp. 153,400 2,511,925
------------
53,076,333
------------
FINANCIAL SERVICES (6.1%)
Beneficial Corp. 62,500 7,769,531
Capital One Financial Corp. 20,000 1,577,500
Countrywide Credit
Industries, Inc. 150,000 7,978,125
Federal Home Loan
Mortgage Corp. 300,000 14,231,250
Federal National Mortgage Co. 98,800 6,249,100
Morgan Stanley, Dean Witter,
Discover & Co. 150,000 10,931,250
Paychex, Inc. 145,200 8,403,450
SLM Holding Corp. 100,000 4,362,500
Travelers Group, Inc. 276,700 16,602,000
------------
78,104,706
------------
FOOD, BEVERAGE & RESTAURANTS (5.0%)
Anheuser Busch, Inc. 237,800 11,013,112
Campbell Soup Co. 117,200 6,651,100
Diageo PLC ADR 103,680 5,047,920
Dole Food Co. 150,000 7,256,250
Dreyers Grand Ice Cream 148,800 3,273,600
General Mills, Inc. 49,200 3,739,200
International Home Foods, Inc. (a) 87,300 2,902,725
Landry's Seafood Restaurants (a) 167,200 5,141,400
PepsiCo, Inc. 86,300 3,678,537
Starbucks Corp. (a) 197,100 8,931,094
Vlasic Foods International, Inc. (a) 11,720 299,592
Wendy's International, Inc. 266,100 5,937,356
------------
63,871,886
------------
HOTELS & ENTERTAINMENT / LEISURE (0.6%)
Marriott International, Inc. 49,600 1,844,500
Marriott International, Inc.,
Class A 49,600 1,776,300
Time Warner, Inc. 54,500 3,930,812
------------
7,551,612
------------
INDUSTRIAL EQUIPMENT (3.1%)
Caterpillar, Inc. 130,000 7,158,125
Deere & Co. 116,500 7,215,719
Fastenal Co. (a) 151,800 6,584,325
JLK Direct Distribution, Inc. (a) 145,900 5,571,556
MSC Industrial Direct Co., Inc. (a) 127,500 6,908,906
New Holland NV 207,500 5,654,375
------------
39,093,006
------------
</TABLE>
See Notes to Schedule of Investments. 13
<PAGE>
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
<S> <C> <C>
INSURANCE (7.0%)
AFLAC, Inc. 200,000 $ 12,650,000
Aon Corp. 144,675 9,367,706
CIGNA Corp. 36,900 7,564,500
Conseco, Inc. 145,400 8,233,275
Exel Limited 220,000 17,050,000
Marsh & McLennan
Companies, Inc. 41,400 3,617,325
Progressive Corp. 75,000 10,101,563
Providian Financial Corp. 199,800 11,476,013
Transamerica Corp. 85,000 9,902,500
------------
89,962,882
------------
METALS & MINING (1.2%)
Allegheny Teledyne, Inc. 166,000 4,616,875
Aluminum Company of America 94,800 6,523,425
Freeport-McMoRan Copper
& Gold, Inc., Class A 185,000 3,688,438
------------
14,828,738
------------
OIL & GAS (5.7%)
Atlantic Richfield Co. 35,000 2,751,875
Baker Hughes, Inc. 178,100 7,168,525
Burlington Resources, Inc. 69,500 3,331,656
ELF Aquitaine ADR 116,200 7,523,950
Enron Corp. 63,800 2,958,725
Exxon Corp. 75,300 5,092,162
Kerr-McGee Corp. 86,100 5,989,331
Mobil Corp. 76,100 5,831,163
Pioneer Natural Resources Co. 111,100 2,763,613
Schlumberger Ltd. 114,100 8,643,075
Texaco, Inc. 86,000 5,181,500
Tosco Corp. 110,600 3,898,650
Triton Energy Corp. (a) 15,800 580,650
Union Pacific Resources Group 255,600 6,102,450
USX-Marathon Group 120,000 4,515,000
------------
72,332,325
------------
PAPER (0.9%)
Champion International Corp. 120,000 6,517,500
Temple-Inland, Inc. 74,400 4,622,100
------------
11,139,600
------------
POLLUTION CONTROL (0.4%)
Waste Management, Inc. 155,800 4,800,588
------------
PUBLISHING (1.4%)
American Greetings Corp.,
Class A 130,400 5,998,400
Gannett Co., Inc. 93,200 6,698,750
R. R. Donnelley & Sons Co. 120,000 4,927,500
------------
17,624,650
------------
SHARES MARKET VALUE
REAL ESTATE INVESTMENT TRUSTS (1.7%)
Crescent Real Estate Equities Co. 90,000 $ 3,240,000
Equity Office Properties Trust 75,377 2,308,421
Patriot American Hospitality, Inc. 110,100 2,972,700
Starwood Hotels & Resorts 189,800 10,130,575
Vornado Realty Trust 80,500 3,506,781
------------
22,158,477
------------
RETAIL TRADE (7.0%)
Arbor Drugs, Inc. 155,800 3,671,037
CDW Computer Centers, Inc. (a) 73,500 4,400,813
Circuit City Stores, Inc. 105,100 4,493,025
CVS Corp. 94,800 7,157,400
Dollar General Corp. 115,250 4,458,735
Family Dollar Stores 122,700 4,662,600
Federated Department
Stores, Inc. (a) 52,000 2,694,250
Fred Meyer, Inc. (a) 99,390 4,571,940
Home Depot, Inc. 74,150 5,000,491
Kmart Corp. (a) 78,100 1,303,294
Kohl's Corp. (a) 67,500 5,518,125
May Department Stores Co. 150,000 9,525,000
Nordstrom, Inc. 110,800 7,070,425
Safeway, Inc. (a) 88,200 3,257,887
Staples, Inc. (a) 302,250 7,008,422
Toys R Us, Inc. (a) 75,400 2,266,712
Walgreen Co. 142,700 5,021,256
Wal-Mart Stores, Inc. 70,600 3,587,362
Whole Foods Market, Inc. (a) 62,800 4,380,300
------------
90,049,074
------------
TELECOMMUNICATIONS (7.0%)
AT&T Corp. 97,800 6,418,125
Bell Atlantic Corp. 73,000 7,482,500
GTE Corp. 173,400 10,382,325
MCI Communications Corp. 115,000 5,692,500
SBC Communications, Inc. 488,200 21,297,725
Sprint Corp. 229,300 15,549,406
Tele Communications - TCI
Ventures, Class A (a) 318,162 5,607,605
US West Media Group (a) 100,700 3,499,325
WorldCom, Inc. (a) 297,800 12,824,013
------------
88,753,524
------------
TRANSPORTATION (1.7%)
AMR Corp. (a) 70,000 10,023,125
Burlington Northern Santa Fe 66,500 6,924,313
CSX Corp. 33,400 1,987,300
Delta Air Lines, Inc. 23,600 2,789,225
------------
21,723,963
------------
TOTAL COMMON STOCKS
(Cost $835,535,628) 1,259,872,982
-------------
</TABLE>
14 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS / PER SHARE CHANGES IN NET ASSETS AS OF MARCH 31,
1998 (UNAUDITED)
................................................................................
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PREFERRED STOCK (0.2%) SHARES MARKET VALUE
ELECTRIC UTILITIES (0.2%)
Houston Industries 7% Convertible 50,000 $ 3,240,625
(Cost $2,793,250) --------------
INTEREST MATURITY PAR
SHORT-TERM INVESTMENTS (0.8%) RATE DATE VALUE
COMMERCIAL PAPER (0.1%) ------ ---------- --------
Household Finance Corp. 5.56% 04/02/98 $ 700,000 699,905
Merrill Lynch 5.72 04/07/98 1,000,000 999,047
--------------
TOTAL COMMERCIAL PAPER (COST $1,698,952) 1,698,952
--------------
REPURCHASE AGREEMENT (0.7%)
ABN AMRO Chicago Corp., dated 3/31/98, 5.95% to be repurchased
at $8,816,457 on 4/01/98, collateralized by U.S. Treasury notes and bills
with various maturities to 2002, with a current market value of $9,021,300. 8,815,000 8,815,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $10,513,952) 10,513,952
--------------
TOTAL INVESTMENTS (99.6%) (COST $848,842,830) (b) 1,273,627,559
OTHER ASSETS AND LIABILITIES, NET (0.4%) 4,504,079
--------------
NET ASSETS (100.0%) $1,278,131,638
--------------
NET ASSET VALUE PER SHARE (86,362,669 SHARES OUTSTANDING) $14.80
--------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Gross unrealized appreciation and depreciation of investments at March 31, 1998 is as follows:
Gross unrealized appreciation $434,277,637
Gross unrealized depreciation (9,492,908)
------------
Net unrealized appreciation $424,784,729
------------
</TABLE>
Acronym Name
- --------- ---------------------------
ADR American Depository Receipt
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, 1998 ------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE CHANGES IN NET ASSETS
Net asset value at beginning of period $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
------- ------- ------- ------- ------- -------
Net investment income 0.02 0.05 0.08 0.10 0.11 0.12
Distributions declared (0.35) (1.33) (1.18) (1.04) (1.00) (1.07)
Changes due to rights offerings (a) -- -- -- -- (0.05) (0.03)
Net realized and unrealized
gain (loss) on investments 1.81 3.01 2.15 2.71 (0.20) 0.78
Provision for federal income tax -- (0.36) (0.13) -- -- (0.18)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 14.80 $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
------- ------- ------- ------- ------- -------
</TABLE>
(a) Effect of Fund's rights offerings for shares at a price below net asset
value.
15
<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 4/30/98
NAME TYPE SYMBOL OBJECTIVE (millions)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liberty All-Star Closed-End USA Growth & Income $1,289
Equity Fund
Liberty All-Star Closed-End ASG Growth 191
Growth Fund, Inc.
Liberty All-Star Equity Open-End, -- Growth & Income 30
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 3.462 shares as of March 31, 1998, with a
total net asset value of $51.24. 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.
16
<PAGE>
NOTES
................................................................................
17
<PAGE>
NOTES
................................................................................
18
<PAGE>
NOTES
................................................................................
19
<PAGE>
[back cover]
[Liberty All*Star logo] LIBERTY
ALL*STAR
--------
EQUITY FUND
New York Stock Exchange Trading Symbol: USA
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lamco.com
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110
CUSTODIAN
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
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*
Harold W. Cogger
James E. Grinnell*
Richard W. Lowry*
William E. Mayer*
Dr. John J. Neuhauser*
OFFICERS
Harold W. Cogger, Chairman of the Board of Directors
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).
[Liberty financial logo]
