[front cover]
[graphic: background photo of prospectus page, in the shape of a square. Words
overlaid: VALUE, CONSISTENCY, OBJECTIVITY, GROWTH]
............................................
[logo: LIBERTY
ALL[Star]STAR
-------------
EQUITY FUND]
A N N U A L R E P O R T 1 9 9 8
<PAGE>
[inside front cover]
[logo: LIBERTY
ALL[Star]STAR
-------------
EQUITY FUND]
- --------------------------------------------------------------------------------
Why should the benefits of institutional-like
investing be reserved for institutions?
ONE OF THE MOST THOROUGH, SOPHISTICATED, DELIBERATE FORMS OF INVESTMENT
MANAGEMENT IS THAT PROVIDED ON BEHALF OF MAJOR INSTITUTIONS, INCLUDING LARGE
CORPORATE PENSION PLANS, MAJOR FOUNDATIONS AND UNIVERSITY ENDOWMENT FUNDS.
ALTOGETHER, THEIR ASSETS EXCEED $7 TRILLION IN THE UNITED STATES ALONE.
IN LATE 1986, LIBERTY ALL-STAR EQUITY FUND ("ALL-STAR" OR THE "FUND") WAS FORMED
SPECIFICALLY TO BRING THE BENEFITS OF INSTITUTIONAL-LIKE INVESTING TO YOU, THE
INDIVIDUAL INVESTOR.
GENERALLY SPEAKING, THE INSTITUTIONAL INVESTING PROCESS IS CHARACTERIZED BY THE
STRATEGIC ALLOCATION OF ASSETS TO MULTIPLE MANAGERS WHO PRACTICE DIFFERENT
INVESTING STYLES. CAREFULLY SELECTED TO MEET SPECIFIC INVESTMENT OBJECTIVES, THE
MANAGERS ARE RIGOROUSLY MONITORED. SHOULD THEY FAIL TO MEET THE PERFORMANCE
OBJECTIVES SET OUT FOR THEM, THEY ARE REPLACED BY THOSE WHO CAN.
LIBERTY ASSET MANAGEMENT COMPANY ("LAMCO") HAS ADAPTED THIS PROCESS TO DEVELOP A
SPECIFIC INVESTMENT PROGRAM FOR ALL-STAR. A MORE DETAILED DESCRIPTION OF THIS
PROGRAM IS CONTAINED ON PAGES 6 THROUGH 9.
IF THERE'S ONE THING THIS TYPE OF INVESTING CAN BE COUNTED ON TO DELIVER, IT'S
CONSISTENT RESULTS. AND OUR GOALS FOR ALL-STAR HAVE ALWAYS BEEN
BETTER-THAN-AVERAGE LONG-TERM RETURNS AND BETTER-THAN-AVERAGE CONSISTENCY,
COMPARED WITH OTHER MAJOR GROWTH AND INCOME FUNDS.
ON THIS TWELFTH ANNIVERSARY OF ALL-STAR, WE RENEW OUR COMMITMENT TO BRING TO THE
FUND THE BEST APPLICABLE INSTITUTIONAL INVESTMENT MANAGEMENT PRACTICES AS THEY
CONTINUE TO EVOLVE.
LIBERTY ASSET MANAGEMENT COMPANY
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
1998 Annual Report Fund Manager's Letter
To Our Fellow Shareholders: February 1999
The net asset value (NAV) of a common share of the Fund increased from
$12.26 on September 30, 1998, to $14.22 on December 31, 1998, after deducting
the distribution of 34 cents declared during the quarter. The market price of a
share of the Fund traded in a range from $10.00 to $13.125 before closing the
quarter at $12.938. The ending price represented a discount to NAV of 9.0
percent compared with a discount to NAV of 5.2 percent on September 30, 1998.
Key investment results and comparisons are noted below.
As the table shows, the Fund's net asset value increased 19.2 percent
during the fourth quarter, which compares with the increases of 17.8 percent for
the Lipper Growth & Income Mutual Fund Average (the Fund's primary benchmark)
and 21.3 percent and 17.6 percent for the S&P 500 Index and Dow Jones Industrial
Average, respectively. For the full year, the Fund's net asset value was up 19.8
percent compared with increases of 15.6 percent for the Lipper Growth & Income
Mutual Fund Average and 28.6 percent and 18.1 percent for the S&P 500 and the
Dow Jones, respectively.
<TABLE>
<CAPTION>
=====================================================================================
Fourth Quarter Full Year
- -------------------------------------------------------------------------------------
<S> <C> <C>
LIBERTY ALL-STAR EQUITY FUND:
Shares Valued at Net Asset Value 19.2% 19.8%
Shares Valued at Market Price
With Dividends Reinvested 14.3% 9.1%
Fund's Closing Price Range $12.938 to $10.563 $14.50 to $10.50
Fund's (Discount)/Premium Range (9.2%) to (3.7%) (9.2)% to 2.5%
Lipper Growth & Income Mutual Fund Average 17.8% 15.6%
S&P 500 Stock Index 21.3% 28.6%
Dow Jones Industrial Average 17.6% 18.1%
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 market price reinvested returns assume the
exercise of all primary subscription rights in the recent rights offering.
Figures shown for the unmanaged S&P 500 Index and Dow Jones Industrial Average
are total returns including income.
=====================================================================================
</TABLE>
---[1]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
1998 Annual Report Fund Manager's Letter
The stock market, as measured by the S&P 500, rose 21.3 percent during the
fourth quarter. That gain not only reversed all of the decline experienced in
the third quarter, but also ranked as the second largest quarterly return for
that index in more than 50 years, eclipsed only by the 22.9 percent rise in the
first quarter of 1975. The sharp rebound in stock prices as the year came to a
close also enabled that index to post an unprecedented fourth consecutive year
of gains in excess of 20 percent. A deeper analysis of the results, however,
shows that most stocks did not perform as well as the capitalization-weighted
S&P 500 Index would suggest.
During most of the year investors were willing to pay greater premiums for
earnings visibility in an effort to avoid negative earnings surprises as profit
growth slowed. In fact, most of the gain in the S&P 500 for the year was
attributable to multiple expansion in the very large growth stocks, where
earnings shortfalls were least likely to occur. The 20 largest growth stocks in
the S&P 500 accounted for more than half of the gain in that index. Those same
stocks now comprise over one-third of its capitalization, a dominance which has
not been seen since 1973.
Another way to assess how large stocks influence a capitalization-weighted
index like the S&P 500 is to compare performance on an equal-weighted basis. By
doing that, each stock regardless of size has equal representation. The S&P 500
on an equal-weighted basis returned 12.8 percent for 1998, which was an
extraordinary 15.8 percent less than when calculated by market capitalization.
The chart that follows illustrates how the equal- and capitalization-weighted
S&P 500 indices have performed since the start of this bull market in 1982.
[bar chart]
S&P 500 Equal-Weighted vs. S&P 500 Cap-Weighted
Calendar Year Performance Through December 31, 1998
S&P Equal-Weighted Outperformed
<TABLE>
<S> <C>
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 -15.8%
</TABLE>
S&P Cap-Weighted Outperformed
[end bar chart]
---[2]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
1998 Annual Report Fund Manager's Letter
The influence of the very large stocks in the S&P 500 was even more
dramatic during the second half of the year. When we last showed this comparison
in the Fund's 1998 semi-annual report, the capitalization-weighted index had
outperformed by 5.7 percent during the first half of the year. As you can see
from this chart, that advantage widened considerably during this year's volatile
second half. Most active managers, like those in your Fund, pursue more of an
equal-weighted strategy to avoid undue concentration. Therefore, they tended to
outperform the capitalization-weighted index during periods like 1982-83 and
1991-94, when the market was not being dominated by a narrow group of stocks. As
you can see from the chart, and if history is any guide, it would be unusual for
present conditions to persist much longer.
In addition to our traditional Manager Roundtable that begins on page 16,
we have included an interview with John Carberry, Chairman of the Fund's Board
of Trustees, and William Parmentier, President of Liberty Asset Management
Company. We encourage you to read this interview, which provides insights into
multi-management as an investment strategy and how LAMCO has implemented that
strategy for individual investors.
Thank you for your continuing support of the Fund.
Sincerely,
<TABLE>
<S> <C>
/s/ Richard R. Christensen /s/ William R. Parmentier, Jr.
Richard R. Christensen William R. Parmentier, Jr.
President, Liberty All-Star Equity Fund Chief Investment Officer, Liberty All-Star Equity Fund
Chairman, Liberty Asset Management Company President, Liberty Asset Management Company
</TABLE>
---[3]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Shareholders' Investment Growth
As of December 31, 1998
[mountain chart]
<TABLE>
<CAPTION>
Net Asset Value Additional
of Shares Acquired Investments
Net Asset Value Through Dividend Made Through
of One Share Reinvestment Rights Offerings
<S> <C> <C> <C> <C>
1987 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
1988 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
1989 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
1990 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
1991 9.37 14.72 14.72
10.04 15.77 15.77
10.18 16.42 16.42
10.11 16.31 16.31
10.62 17.13 17.13
9.87 16.33 16.33
10.35 17.13 17.13
10.39 17.65 17.65
10.33 17.55 17.55
10.52 17.87 17.87
9.92 17.28 17.28
11.2 19.51 19.51
1992 11 19.16 19.16
10.77 19.25 19.25
10.56 18.87 18.87
10.66 19.05 20.96
10.76 19.23 21.15
10.23 18.77 20.65
10.69 19.59 21.56
10.21 19.18 21.11
10.45 19.64 21.61
10.55 19.82 21.82
10.68 20.57 22.64
10.78 20.76 22.85
1993 10.86 20.92 23.02
10.7 20.61 22.68
10.75 21.23 23.37
10.42 20.58 22.65
10.52 21.29 23.44
10.56 21.37 23.53
10.54 21.33 23.48
10.73 22.26 24.52
10.79 22.39 24.66
10.84 22.49 26.27
10.34 22 25.69
10.4 22.48 26.25
1994 10.77 23.28 27.18
10.34 22.91 26.75
9.85 21.83 25.48
9.93 22 25.69
9.8 22.26 25.98
9.48 21.53 25.13
9.78 22.21 25.93
9.99 23.28 27.17
9.69 22.58 27.86
9.86 22.97 28.35
9.17 21.97 27.11
9.26 22.19 27.79
1995 9.4 22.52 26.75
9.49 23.31 28.78
9.83 24.14 29.78
9.98 24.51 30.24
10.13 25.49 31.44
10.53 26.49 32.69
10.95 27.55 33.99
10.74 27.73 34.21
11.05 28.53 35.19
10.93 28.22 34.81
11.04 29.23 36.07
11.03 29.21 36.04
1996 11.39 30.16 37.21
11.57 30.64 37.8
11.42 31.01 38.26
11.65 31.63 39.03
11.62 32.42 40.01
11.53 32.17 39.7
10.88 30.36 37.46
10.98 31.41 37.5
11.71 33.5 38.5
11.88 33.99 41.94
12.35 36.31 44.81
11.95 35.54 43.86
1997 12.65 37.62 46.43
12.55 37.32 46.06
11.73 35.81 44.19
12.19 37.22 45.92
12.77 39.96 49.3
13.31 41.65 51.39
14.29 44.71 55.17
13.34 42.81 52.83
14.01 44.96 55.48
13.51 43.35 53.5
13.52 44.49 54.92
13.32 45.02 55.57
1998 13.3 44.95 55.49
14.4 48.67 60.08
14.8 51.24 63.26
14.93 51.64 63.77
14.05 48.6 60.01 ____
14.42 51.29 65.83 | To evaluate your
14.12 50.22 61.63 | investment in
11.46 41.96 49.33 | All-Star, these
12.26 44.88 57.6 | values should be
13.1 47.96 61.64 | used. Each shows how
13.39 50.35 64.61 | your investment has
14.22 53.47 68.61 | fared by keeping
|____| |_________________________| | distributions at
___ | | | work in the Fund.
This is the | | | | The upper value
net asset |---------- -------------------------| includes additional
value of one | | investments made
share of | | through rights
All-Star as | | offerings in 1992,
of 12/31/98. | | 1993, 1994 and 1998.
---- ----
</TABLE>
[end mountain chart]
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 $68.61 (4.825 shares times the current $14.22 net asset value
per share) and a market price value of $62.42 (4.825 shares times the current
$12.938 market price per share). Excluding the rights offerings shares, an
original share has grown to 3.760 shares. Thus, the original share has grown to
a net asset value of $53.47 (3.760 shares times the current $14.22 net asset
value per share) and a market price value of $48.65 (3.760 shares times the
current $12.938 market price per share).
---[4]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
A Table of Per-Share Values, Distributions and Reinvestment
Since All-Star's Inception
<TABLE>
<CAPTION>
Shares Shares Market Total
Shares Per Purchased Acquired Shares NAV(1) Total Price Per Market
Owned At Share Through Through Owned Per Share NAV Of Share At Price Of
Beginning Distri- Reinvestment Rights At End At End Shares End Shares
Year Of Year butions Program Offering Of Year Of Year Owned Of Year Owned
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1987 1.000 $1.18 .140 -- 1.140 $7.90 $9.01 $6.00 $6.84
- ------------------------------------------------------------------------------------------------------------------------------------
1988 1.140 0.64 .107 -- 1.247 8.29 10.34 7.25 9.04
- ------------------------------------------------------------------------------------------------------------------------------------
1989 1.247 0.95 .156 -- 1.403 9.58 13.44 8.25 11.57
- ------------------------------------------------------------------------------------------------------------------------------------
1990 1.403 0.90 .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 .277 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
3rd quarter 4.565 0.34 .133 -- 4.698 12.26 57.60 11.625 54.61
4th quarter 4.698 0.34 .127 -- 4.825 14.22 68.61 12.938 62.42
- ------------------------------------------------------------------------------------------------------------------------------------
</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
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.
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its common shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. The fixed distributions are not
related to the amount of the Fund's net investment income or net realized
capital gains or losses. If, for any calendar year, the total distributions
required by the 10 percent pay-out policy exceed the Fund's net investment
income and net realized capital gains, the excess will generally be treated as a
tax-free return of capital, reducing the shareholder's adjusted basis in his or
her shares. If the Fund's net investment income and net realized capital gains
for any year exceed the minimum amount required to be distributed under the 10
percent pay-out policy, the Fund may, at its discretion, retain and not
distribute net realized capital gains and pay income tax thereon to the extent
of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.
---[5]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Why Multi-Management?
Most mutual funds are run by a single portfolio manager or an in-house team of
managers who pursue a particular investment style, whether it be growth or
value. But styles go in and out of favor. What produces strong returns one year
may produce disappointing results the next. That's a prescription for increased
volatility.
All-Star utilizes multi-management, the same approach that is practiced by most
large institutions such as pension and endowment plans. Rather than rely on a
single investment style, multi-management combines managers who practice
different investment styles to reduce volatility while producing attractive
returns.
All-Star's long-term track record provides clear testimony to the value of the
multi-management strategy. As you can see from the chart below, All-Star has
produced ten years of better-than-average returns and better-than-average
consistency compared with other major growth and income funds.
Ten Years of Better-than-Average Returns and Better-than-Average Consistency
Compared with Other Major Growth and Income Funds
All-Star's
high return and
high consistency
combination is
well-placed
among the
universe of other
major growth and
income funds.
[representation of scatter data]
All-Star Universe
Average
16.5 3.7
16.4 5.3
13.9 5.5
15.2 4.9
15.5 3.6
16 2.9
11.8 4.9
16.1 3.3
16.4 4.5
14.9 3.7
18.6 4
16.2 4.3
16.1 5.5
20.3 4.1
17.3 3.9
9.3 11.5
14.3 4.6
10.9 4.7
17.2 3
16.4 3.3
15.8 4.4
14.1 5.4
16.2 2.9
15.7 3.7
15 4.9
19.2 2.4
14.3 7.4
14.6 7.9
18.9 4
14.3 7.4
14.6 5.9
14.9 6.5
13.9 4.3
16.8 5.5
11.8 6
16.9 3.3
16.2 4.3
15 5.1
16.4 4.9
16.6 3.6
15.6 4.4
18 5.8
17.8 2.7
15.9 3.1
17.1 4.1
13.9 7.5
19 2.1
15.5 3.7
17.3 3.8
13.4 7.4
13.3 5.5
16.5 3.8
15.8 4.7
17.8 3.2
[end of representation of scatter data]
Each dot represents the precise return and consistency of one fund over the past
10 years (January 1, 1989, through December 31, 1998) in the universe of 52
Growth & Income Funds (as classified by both Morningstar, Inc. and Lipper, Inc.)
that had at least $100 million in net assets at the beginning of the 10 year
period.
Consistency is measured by examining the volatility of "non-market" monthly
returns, calculated by subtracting the return of the S&P 500 Stock Index from
each mutual fund's return. The lower the volatility, the higher the consistency
of results compared with the stock market.
---[6]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
Constructing the Manager Team
LAMCO has identified five different styles as the best combination to achieve
All-Star's investment objectives.
Three of the styles, representing 60 percent of All-Star's assets, are Value
styles, which focus on the selection of companies that trade at comparatively
low multiples of company earnings and book value. The other two styles,
representing 40 percent of the assets, are Growth styles, which focus on the
selection of companies whose growth prospects are better than the average
company. Within these broad styles of Value and Growth are the specific
styles shown in the pie chart below.
LAMCO searches for successful, independent investment management organizations
to hire as Portfolio Managers for All-Star. LAMCO employs qualitative and
quantitative analysis, face-to-face meetings and other techniques to select
managers who can bring to All-Star both a value-added approach and the ability
to complement the investment styles of the other managers.
The managers LAMCO selects are distinguished by a number of characteristics:
[bullet] A constant focus on a particular style of investing.
[bullet] A disciplined investment decision-making process.
[bullet] A record of success relative to other managers who practice the same
style.
[bullet] Continuity among the investment professionals, so that those who have
built the record remain the managers.
[bullet] A well-managed, highly responsive organization.
The pie chart below shows the Portfolio Manager lineup and percentage
allocations to each.
[pie chart data]
20% -- WESTWOOD MANAGEMENT CORPORATION
Growth / Growth companies selling at reasonable valuations based on the
firm's earnings projections which are not yet reflected in consensus
estimates.
20% -- WILKE / THOMPSON CAPITAL MANAGEMENT, INC.
Growth / Companies that demonstrate the ability to sustain strong secular
growth across a broad range of market capitalizations.
20% -- BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Value / companies with low price-to-earnings and price-to-book ratios
where a catalyst for positive change has been identified.
20% -- OPPENHEIMER CAPITAL
Value / Companies that exhibit the ability to generate excess cash flow
while earning high returns on invested capital.
20% -- J.P. MORGAN INVESTMENT MANAGEMENT INC.
Value / Companies diversified across all sectors that are undervalued
relative to the firm's projected growth rates.
[end pie chart]
As with anything in investments, circumstances change, so...
---[7]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
Manager Evaluation and, Occasionally, Replacement
...LAMCO conducts continuing evaluation of the Portfolio Managers. The purpose
is to be sure that each is still the best choice for All-Star. Through frequent
meetings with the Portfolio Managers, and through qualitative and quantitative
analyses, each is continually evaluated to assure that:
[bullet] It is consistently practicing its Investment Style.
[bullet] Its transactions and holdings reflect the Style.
[bullet] Its organization and investment process continue to support the
Style.
[bullet] Its investment performance is competitive when compared with other
managers using a similar Style.
Also, LAMCO is alert to assuring the proficiency of the Portfolio Manager team.
The objective is to be certain that the team remains an optimal combination,
giving All-Star the full benefits of Multi-Management. The procedures include:
[bullet] Assuring that All-Star's total portfolio has the proper investment
characteristics.
[bullet] Researching new investment managers as possible future Portfolio
Managers.
[bullet] Making Portfolio Manager changes when necessary. Eight Portfolio
Managers have been replaced from inception in 1986 through 1998.
Further, LAMCO shifts assets among the Portfolio Managers at selected times. As
the previous pie chart indicates, All-Star's assets are allocated among the five
Portfolio Managers to provide the desired style diversification. However, each
day stock market action changes the actual assets under management of the
various managers. Accordingly, from time to time, LAMCO reallocates assets back
to the original allocations in order to preserve the benefits of All-Star's
Multi-Management methodology. This procedure is called rebalancing.
The anatomy of All-Star's Multi-Management structure is visible in its Portfolio
Characteristics on the following page. For reference, they are compared with the
S&P 500 Stock Index.
---[8]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO's Multi-Management Program:
Portfolio Characteristics
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.
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 the
firm's 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 the firm's 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.
PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INVESTMENT STYLE SPECTRUM
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 34 82 28 47 42 196 500
- ------------------------------------------------------------------------------------------------------------------------
Percent of Holdings in Top 10 44% 25% 57% 31% 34% 16% 21%
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $44 $57 $48 $44 $36 $46 $87
- ------------------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth 14% 16% 18% 19% 30% 20% 16%
- ------------------------------------------------------------------------------------------------------------------------
Dividend Yield 1.4% 1.5% 1.2% 1.4% 0.2% 1.1% 1.3%
- ------------------------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 14x 25x 22x 25x 40x 24x 26x
- ------------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 4.1x 5.2x 4.3x 4.8x 7.6x 5.2x 5.9x
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
---[9]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Top 50 Holdings
As of December 31, 1998
<TABLE>
<CAPTION>
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
12/31/98 9/30/98 SECURITY NAME ($000) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 31 Citigroup, Inc.* $34,556 2.6%
2 2 MCI WorldCom, Inc. 26,609 2.0
3 11 Freddie Mac 25,640 1.9
4 18 AT&T Corp. 20,731 1.5
5 9 Waste Management, Inc. 18,088 1.3
6 3 First Union Corp. 17,277 1.3
7 5 Monsanto Co. 16,915 1.3
8 17 AFLAC, Inc. 16,500 1.2
9 10 EXEL Limited 16,500 1.2
10 1 International Business Machines Corp. 16,383 1.2
11 60 Lockheed Martin Corp. 16,331 1.2
12 8 CVS Corp. 16,222 1.2
13 49 Compaq Computer Corp. 15,957 1.2
14 48 CIGNA Corp. 15,347 1.1
15 19 Microsoft Corp. 14,992 1.1
16 16 Nokia Corp. ADR 14,453 1.1
17 15 Sprint Corp. 14,301 1.1
18 33 Cisco Systems, Inc. 12,980 1.0
19 26 Staples, Inc. 12,936 1.0
20 42 Intel Corp. 12,354 0.9
21 43 Avon Products, Inc. 11,948 0.9
22 7 American Home Products Corp. 11,910 0.9
23 4 GTE Corp. 11,491 0.9
24 58 Eli Lilly & Co. 11,420 0.8
25 57 Atlantic Richfield Co. 11,412 0.8
26 52 Morgan Stanley Dean Witter & Co. 11,225 0.8
27 29 Conseco, Inc. 10,859 0.8
28 36 Fleet Financial Group, Inc. 10,698 0.8
29 12 SBC Communications, Inc. 10,596 0.8
30 6 Anheuser-Busch Companies, Inc. 10,474 0.8
31 14 Philip Morris Companies, Inc. 10,128 0.7
32 53 Cintas Corp. 9,914 0.7
33 25 Transamerica Corp. 9,818 0.7
34 46 Albertson's, Inc. 9,642 0.7
35 22 Bell Atlantic Corp. 9,630 0.7
36 NEW Dayton Hudson Corp. 9,581 0.7
37 20 Boeing Co. 9,549 0.7
38 45 ACE Limited 9,408 0.7
39 23 Paychex, Inc. 9,243 0.7
40 79 Starbucks Corp. 9,165 0.7
41 41 May Department Stores Co. 9,056 0.7
42 39 Pfizer, Inc. 9,038 0.7
43 67 Ford Motor Co. 8,962 0.7
44 72 Tyco International Ltd. 8,923 0.7
45 27 Wells Fargo & Co. 8,906 0.7
46 80 Home Depot, Inc. 8,900 0.7
47 128 Temple-Inland, Inc. 8,867 0.7
48 35 Cardinal Health, Inc. 8,847 0.7
49 68 Ingersoll-Rand, Co. 8,838 0.7
50 24 Elan Corp. ADR 8,727 0.6
</TABLE>
* Citicorp merged with Travelers Group, Inc. to form Citigroup, Inc.
---[10]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Major Stock Changes in the Fourth Quarter
The following are the major ($4.0 million or more) stock changes -- both
additions and reductions -- that were made in the Fund's portfolio during the
fourth quarter of 1998.
<TABLE>
<CAPTION>
SHARES
==============================================================
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 12/31/98
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna, Inc. 70,300 70,300
AT&T Corp. 84,900 275,500
Atlantic Richfield Co. 74,900 174,900
CIGNA Corp. 87,400 198,500
Compaq Computer Corp. 148,200 380,500
Conoco, Inc. 318,700 318,700
Dayton Hudson Corp. 176,600 176,600
Freddie Mac 117,900 397,900
General Motors Corp. 69,400 69,400
Hewlett-Packard Co. 111,400 111,400
Lockheed Martin Corp. 123,000 192,700
Nabisco Holdings Corp. 154,900 154,900
Northern Telecom Limited 152,400 152,400
Oracle Corp. 121,800 121,800
Peco Energy Co. 186,900 186,900
Pennzoil Quaker State Co. 114,900 214,500
Pharmacia & Upjohn, Inc. 139,000 139,000
Temple Inland, Inc. 75,100 149,500
Texaco, Inc. 74,900 135,900
America Online, Inc. * (40,200) 43,000
American Home Products Corp. (108,600) 211,500
Anheuser-Busch Companies, Inc. (151,200) 159,600
Federated Department Stores, Inc. (219,100) 47,100
First Union Corp. (67,200) 284,100
GTE Corp. (140,000) 170,400
International Business Machines Corp. (91,300) 88,675
Litton Industries (108,100) 0
Liz Claiborne, Inc. (236,100) 0
Philip Morris Companies, Inc. (85,700) 189,300
Praxair, Inc. (125,200) 0
SBC Communications, Inc. (98,100) 197,600
Sun Microsystems, Inc. (100,600) 50,700
Tosco Corp. (204,400) 155,900
</TABLE>
* Adjusted for stock split.
---[11]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO Management Interview
[Photo of John V. Carberry and William R. Parmenteir, Jr.]
Chairman of Liberty All-Star Equity Fund's Board of Trustees John V. Carberry
(left) with LAMCO President William R. Parmentier, Jr.
An In-Depth Look at Liberty All-Star Equity Fund With Two of the People
Responsible for Guiding It
INSIGHTS INTO THE ROLE OF THE FUND MANAGER, MULTI-MANAGEMENT, MANAGER
EVALUATION, MANAGER REPLACEMENT AND ASSET REBALANCING
The following is an interview with John V. Carberry, Chairman of Liberty
All-Star Equity Fund's Board of Trustees and William R. Parmentier, Jr.,
President of Liberty Asset Management Company (LAMCO), which serves as the Fund
Manager. This wide ranging discussion gives shareholders the opportunity to meet
two people responsible for key aspects of the Fund's management and to gain
insights into many of the factors that distinguish Liberty All-Star Equity Fund
from other mutual funds.
One of the distinguishing features of Liberty All-Star Equity Fund is that it is
a multi-managed fund. What is multi-management and what are its benefits?
PARMENTIER: Multi-management is an investment strategy where the portfolio
assets are allocated among several portfolio managers pursuing different
investment styles. A benefit of this approach is in its ability to achieve a
specific investment objective with reduced risk. Blending various managers'
investment styles in a single portfolio has the effect of lowering overall
portfolio risk below that of any individual manager on a stand-alone basis.
Another benefit is that these managers are carefully selected to meet specific
investment objectives and are rigorously monitored. Should they fail to meet the
performance objectives set out for them, they are subject to being replaced.
Since they are independent organizations, we are always able to maintain our
objectivity throughout the entire process.
CARBERRY: That's right, over time multi-management provides investors with a
more favorable long-term risk-return profile. With multi-management, returns in
years when the stock market is strong may not be at the very top of the range
when compared with other managers, but certainly in the top half and very often
in the top third. On the other hand, in a poor year for the stock market,
returns won't sink to the bottom. In effect, you will generally have more
consistent and predictable returns, which will translate into superior long-term
results.
The point, then, seems to be one of consistency of returns.
PARMENTIER: Yes, absolutely. Our multi-management investment approach, by
design, probably will not hit a performance "home run" in any given year.
However, it will avoid the bad years when it underperforms its objective
significantly. It's all about consistency over time; that's where this strategy
adds value. Large institutions have long understood, as LAMCO does, that
investment discipline and patience are the key to superior long-term results.
One of multi-management's main benefits for the individual investor, or for any
investor for that matter, is diversification. How, specifically, does that apply
to the Fund?
PARMENTIER: The Fund is not diversified simply by randomly combining five top
performing managers. True, we seek to retain the highest quality firms, but they
are also
---[12]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO Management Interview
chosen based upon how they complement each other. The combined manager line-up
must create a fund that is appropriately structured to fulfill its stated
investment objective. While there are various approaches to combining investment
styles in a multi-managed portfolio, Liberty All-Star Equity Fund blends growth
and value style managers.
CARBERRY: To take it a step further, there are style sub-categories. For
example, within the growth category there are momentum investors who will pay
very high prices for stocks if their earnings growth rate is accelerating or
there is a positive earnings surprise. On the other hand are the so-called
"GARP", or "growth at a reasonable price" investors. They'll pay for growth, but
they want to pick it up at a reasonable price. The point is that within the Fund
we have three value managers and two growth managers and each takes a different
approach to its basic growth or value discipline.
Looking at 1998, how would you relate multi-management and diversification to
Fund performance? The stock market closed on a resounding note, but there were
some strong downdrafts during the year.
PARMENTIER: Indeed, it was a very volatile year. I'm happy to say, however, that
for 1998 the Fund was in the top third of the funds that comprise the Lipper
Growth & Income Mutual Fund Average and the Fund exceeded that benchmark by more
than 4 percent. Of more importance to long-term investors, the Fund ranks in the
sixteenth percentile of that Lipper benchmark for the past 10 years.
[Begin Callout]
[Photo of William R. Parmentier, Jr.]
" ... for 1998 the Fund was in the top third of the funds that comprise the
Lipper Growth & Income Mutual Fund Average."
[End Callout]
Mentioning the long term, the Fund has been multi-managed since its inception in
1986. How and where did multi-management investing get its start?
PARMENTIER: The concept of multi-management evolved from the institutional
investment management environment. This would include corporate pension plans,
major foundations and university endowment funds. By employing independent
investment managers who practice different but complementary styles, these
institutions found that they were able to produce better results over time than
if they had employed a single manager practicing one style of investment
management.
When it began operations in 1986, didn't Liberty All-Star Equity Fund play a
major role in bringing multi-management to individual investors?
PARMENTIER: It sure did. It was unique in that for the first time it gave the
individual investor access to portfolio managers and an investment approach that
previously were available only to large institutional investors, which probably
explains why it was one of the most successful closed-end offerings of its time.
[Begin Callout]
[Photo of John V. Carberry]
"This is a discipline [rebalancing] that makes sure we don't lose sight of what
we're really trying to do, and that is maintain the risk/return ratio in our
shareholders' favor."
[End Callout]
That brings up a point -- the five portfolio managers for the Fund are familiar
with operating in a multi-management environment. That is, they're accustomed to
carrying out their own styles independent of what others in the "line-up" are
doing.
PARMENTIER: That is correct and it is one of the advantages the Fund provides.
Individual investors have access to the same thinking and investment expertise
as the largest institutions. The firms that LAMCO retains manage their portion
of the Fund's assets as a separate account based upon their specific philosophy
and style. Sometimes those styles use highly concentrated strategies but,
because they are combined with other firms pursuing complementary styles, we can
introduce those more focused approaches.
Back to diversification for a moment: diversification is a strength, but what
about overlaps, or stocks that are owned by more than one of the Fund's five
portfolio managers. Doesn't diversification lead to overlaps?
PARMENTIER: The Fund has minimal stock overlaps. The key to having minimal stock
overlaps within a multi-managed portfolio is doing what John previously
described. By focusing on sub-styles, even within the basic growth and value
investment disciplines, we can seek out managers
---[13]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO Management Interview
who emphasize different company attributes given their investment philosophy and
process. This results in retaining managers that focus on a different universe
of value or growth stocks. The advent of more sophisticated investment
analytical tools has greatly enhanced LAMCO's ability to make those
distinctions.
Liberty Asset Management Company is the Fund Manager. Describe LAMCO's role for
us, please.
PARMENTIER: LAMCO is a manager of managers. The managers are responsible for
selecting the stocks and we're responsible for selecting the managers. If we do
our job effectively, we're then assembling a portfolio of superior stocks within
each respective style. So, our responsibility is really threefold: we must
assure that we have the appropriate mix of managers; we have to make sure they
are really "All-Stars" within their respective styles; and then we have to
perform ongoing performance evaluation and monitoring. We need to ensure that
the managers do what we expected them to do when we hired them. We need to be
certain there is no style drift and there have been no major events within the
organization that could impact their ability to perform up to our expectations.
Finally, in addition to the investment activities of the Fund, LAMCO is
responsible for all the day-to-day operational activities involved in servicing
the Fund and its shareholders.
[Begin Callout]
[Photo of William R. Parmentier, Jr.]
"Individual investors have access to the same thinking and investment expertise
as the largest institutions."
[End Callout]
CARBERRY: Shareholders might be surprised to see the amount of analysis that
LAMCO does in regard to the stock market in general and our managers
specifically. Speaking from the perspective of a Trustee, I can say that there
is an extraordinary amount of analysis that is performed, and the quality is
excellent. LAMCO has state-of-the-art quantitative tools that allows them to
analyze the managers' portfolios over time. The LAMCO team is quick to pick up
on any kind of change. For instance, if a growth manager who has been retained
for its "growth at a reasonable price" style should suddenly exhibit some of the
characteristics of a momentum manager, LAMCO management would detect that. Such
style drift would be a cause for concern, since we might already have a momentum
manager, so there is a potential for overlap. Obviously, if something like this
should happen, LAMCO would be communicating with the manager to ascertain if
corrective action is necessary. So when LAMCO marries both the qualitative and
quantitative factors it monitors, they're able to ask portfolio managers some
very deep and probing questions. In that way, they're able to get comfortable
with a manager and understand their investment process, buy and sell
disciplines, how they add value, who the people are, and how they hire and
retain key talent.
In the mutual fund industry, doesn't this happen more frequently than one might
believe. In other words, style drift, management turnover and other events are
not just exceptions.
CARBERRY: Yes, and most individual investors would probably never detect it.
What often happens is that an investor puts together a portfolio of five or six
mutual funds and lets it run. After three or four years, without the investor
realizing it, some of those funds could be practicing the same style, therefore,
the individual is not achieving the diversification desired.
[Begin Callout]
[Photo of John V. Carberry]
"Shareholders might be surprised to see the amount of analysis that LAMCO does
..."
[End Callout]
PARMENTIER: Managers can perform poorly on an absolute basis just because their
style is out of favor with investors. As a result, managers can then begin to
"reach" for performance by investing in what happens to be working at the time.
That can be dangerous because it can take the manager outside their realm of
expertise and cause style drift. We require our managers to stay true to their
investment discipline, and they are judged solely on how well they perform
compared to their respective style and peer group.
How do you determine if a portfolio manager in the Fund should be replaced and
how many has LAMCO changed since the Fund's inception?
---[14]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
LAMCO Management Interview
PARMENTIER: To answer the second part of the question first, we have replaced
eight investment firms since the Fund began operations in 1986. The reasons for
recommending replacement would generally fall into three basic categories. First
would be "style drift," which simply means that the manager or firm has shifted
its investment focus or style from what is was when they were originally
retained. Maintaining "style purity" is important because managers are selected
based upon their "style fit" within the Fund manager line-up. Also, it could be
indicative of a more significant organizational change, either in the research
or portfolio management ranks, which brings me to the second reason for
considering replacement. We want to be assured that the firm has not undergone
organizational or structural changes that would impair its ability to continue
to provide quality investment management. A third reason, which is usually
related to the first two, is a period of poor performance relative to other
managers that practice a similar style of investing.
What about another major responsibility of LAMCO, namely, rebalancing? Tell us
what it is and why it's important.
PARMENTIER: When you assemble a group of portfolio managers in a single fund,
you'll have some managers who are performing better than others because their
style is in favor. When a particular manager's style is in favor, that manager's
weighting in the portfolio will increase relative to the others. Left unchecked,
this will build in a style bias. Periodically, then, we will rebalance the
assets, that is, take assets from the manager or managers who have performed
well and give them to the ones whose style has been out of favor. Now, this may
seem counterintuitive -- after all, you usually want to let your winners run. We
do that to an extent, but when it begins to affect the Fund's characteristics we
will rebalance. At the end of the day, it's all about selling into strength and
buying into weakness and not market timing or anticipating when a particular
style will cycle in or out of favor.
[Begin Callout]
[Photo of William R. Parmentier, Jr.]
"We require our managers to stay true to their investment discipline ..."
[End Callout]
CARBERRY: Two other thoughts: it's human nature to get caught up in your
success. This is a discipline that makes sure we don't lose sight of what we're
really trying to do, and that is maintain the risk/return ratio in our
shareholders' favor. The other thought is that good-performing managers don't
stay at the top forever. As Bill says, it's better to harvest those returns
periodically by selling high and reinvesting with managers who stand to benefit
from a rotation in market sentiment.
[Begin Callout]
[Photo of John V. Carberry]
"One thing we [the Trustees] all have in common is very deep and broad-based
business experience."
[End Callout]
Who is responsible for the governance of the Fund?
CARBERRY: Responsibility for governance of the Fund rests with the Board of
Trustees who represent the interests of the shareholders. One thing we all have
in common is very deep and broad-based business experience. The Trustees include
the former President and CEO of The First Boston Corporation, the former
President of the New York Stock Exchange, the Dean of the Boston College School
of Management, the former Chairman and CEO of U.S. Plywood Corporation and the
former Senior Vice President of Operations at The Rockport Company. It's also
very much of a "hands-on" group in terms of actively guiding policy, meeting
regularly and giving the Fund the benefit of their objectivity and experience,
always keeping the interests of the shareholders uppermost in mind.
If you had only one thought to conclude with, what would it be?
PARMENTIER: I'd tell shareholders that in LAMCO they have an objective,
professional, experienced organization working very hard on their behalf. I'd
also add that the Liberty All-Star Equity Fund has a superior long-term track
record that demonstrates it has been an ideal core domestic equity holding for
its shareholders during the past 12 years.
---[15]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Manager Roundtable
A Narrow Band of Growth Stocks Powered the Market to Another Banner Year in 1998
- -- Now what, a Repeat or a Reversal?
IN EACH OF THE LAST TWO YEARS, THE MARKET USED SHORT-LIVED SELL-OFFS AS A
LAUNCHING PAD FOR NEW HIGHS. IN THIS ROUNDTABLE, ALL-STAR'S PORTFOLIO MANAGERS
ANALYZE WHERE WE'VE BEEN AND TAKE A LOOK AHEAD.
Depending on which segment of it you are talking about, the stock market in 1998
was either very, very good or very, very mediocre. As the Fund's portfolio
managers point out in this Roundtable, the disparity in returns based on
investment style, market capitalization and industrial sector reached an
all-time high. It was a very narrow market in which a few standout stocks did
extremely well -- making it difficult for active portfolio managers to
outperform capitalization-weighted benchmarks, principally the S&P 500. It was
also another year of high volatility (the Dow Jones Industrial Average gained or
lost 100 points or more on 62 trading days in 1998).
How do the Fund's portfolio managers interpret the year? What do they see
ahead? And what stocks are they keeping an eye on right now? For answers, we
talk with the Fund's five portfolio managers in this 1998 Annual Report
Roundtable. The Fund Manager, Liberty Asset Management Company (LAMCO), serves
as the moderator of the Roundtable. The participating portfolio managers and
their investment styles are:
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Portfolio Manager / Mark E. Donovan, Chairman, Equity Strategy Committee
Investment Style / Value -- 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. Boston Partners is the newest of the Fund's five portfolio
management firms, having been added to the team in May 1998.
J. P. MORGAN INVESTMENT MANAGEMENT INC.
Portfolio Manager / Henry D. Cavanna, Managing Director
Investment Style / Value -- J. P. Morgan Investment Management invests primarily
in the stocks of medium- to large-size companies that are undervalued relative
to their projected growth rates. The firm focuses on individual stock selection,
rather than sector rotation, style/theme investing or market timing. Portfolios
are characterized by above-market earnings and dividend growth, but
price-to-book and price-to-earnings ratios that are below or in line with the
market.
OPPENHEIMER CAPITAL
Portfolio Manager / John G. Lindenthal, Managing Director
Investment Style / Value -- Oppenheimer invests in the stocks of quality
companies with sound business prospects that are considered undervalued because
they are currently disliked or are being overlooked by investors. Research
focuses on cash flow analysis. Purchase candidates exhibit a high return on
equity, large undedicated cash flow, and reasonable prices in relation to book
value.
WESTWOOD MANAGEMENT CORPORATION
Portfolio Manager / Susan M. Byrne, President and Chief Investment Officer
Investment Style / Growth -- Westwood's investment strategy is growth at a
reasonable price. The firm employs internally generated, bottom-up, fundamental
research and seeks to identify stocks with misperceived growth expectations.
Proprietary income and balance sheet projections are utilized to identify
securities whose typical portfolio characteristics are characterized by higher
return on equity, higher forecasted 12-month growth rates and lower forecasted
price/earnings ratios than the market.
WILKE/THOMPSON CAPITAL MANAGEMENT, INC.
Portfolio Manager / Mark A. Thompson, Chief Investment Officer
Investment Style / Growth -- Wilke/Thompson concentrates on high quality growth
stocks with sustainable earnings over a spectrum of market capitalization and
emphasizes bottom-up stock picking and fundamental research. The firm utilizes a
team approach to stock selection and ongoing portfolio management.
- --------------------------------------------------------------------------------
The views expressed in this interview represent the managers' views at the
time of the discussion and are subject to change.
- --------------------------------------------------------------------------------
---[16]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Manager Roundtable
LAMCO: Let's begin by looking at 1998, particularly from the vantage point of
your investment style, with emphasis on the fourth quarter. At the same time,
perhaps you could also focus on the time period between July and November, when
the market went through an entire cycle in five months. What lessons should
investors take away from this "time compression?" Susan Byrne, why don't you get
us started?
BYRNE (WESTWOOD -- GROWTH): Westwood's style leads us to growth companies that
are selling at reasonable valuations. Market leadership within the S&P 500 has
narrowed to a handful of companies that are selling at anything but reasonable
valuations. For example, the top five companies in the S&P 500 are selling at 50
times 1999 earnings, while the remaining 495 are selling at 18 times 1999
earnings. These same five companies as a group had a 50 percent return in 1998,
while the bottom 495 returned only 5 percent as a group. The lesson here is that
such a disparity cannot persist for an infinite amount of time. The top
companies are priced for perfection and there is very little margin for error.
Remember that trees don't grow to the sky. Westwood is finding much more
compelling growth company valuations in the bottom 450 of the S&P 500.
[Begin Callout]
" ... trees don't grow to the sky. Westwood is finding much more compelling
growth company valuations in the bottom 450 of the S&P 500."
Susan Byrne / Westwood
[End Callout]
LAMCO: Good thoughts to start off with. Mark Thompson, let's hear from another
growth manager.
THOMPSON (WILKE/THOMPSON -- GROWTH): The year began with concerns over the
economic health of the Far East and ended with a military confrontation with
Iraq. In addition, the President was investigated and ultimately impeached by
the House of Representatives. A major hedge fund required a bail-out after
facing the prospect of insolvency. In the face of these uncertainties, noted
experts advised investors to be cautious. Yet, the S&P 500 Index posted its
fourth consecutive year of 20 percent plus returns. The positive forces that
drove the market were declining interest rates and low levels of inflation.
Internet stocks continued to capture the attention of investors, and 1998 was a
record year for merger and acquisition activity. What may be most remarkable
about the year was the resiliency of the S&P 500. After the market closed on
October 8, the S&P 500 was actually down 1.8 percent for the year. Yet it closed
the year with a 28.6 percent gain.
Our disciplined approach keeps us fully invested and focused on the
long-term fundamentals of the companies in which we invest. Since headlines and
controversy are seldom relevant to long-term investors, being fully invested
allowed our portfolios to enjoy strong returns for the year, despite the fact
that the stock market was driven by the largest cap stocks.
LAMCO: Thank you. Turning to the value perspective, Henry Cavanna, what's the
view from J.P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): Overall, 1998 was a remarkable year in which
returns were strong for large cap stocks and performance trends of the prior
years became extreme. The market did well even though earnings growth for the
overall economy slowed. Growth, high quality and size -- meaning the largest
companies -- led the market again, but to a greater extent than in prior years.
Industrial companies, whose earnings came under pressure due to global economic
forces, did poorly.
We follow a valuation discipline that makes some of these market leaders
look expensive. Earnings momentum and a higher certainty of near-term earnings
are catalysts for owning a stock only if we are able to make a longer-term
valuation case for the holding. Nevertheless, we were able to keep pace with the
market in the fourth quarter, helped by a sector approach that keeps us invested
in all major market sectors, including technology, which exploded on the upside
in the fourth quarter.
The July through November period was unusually volatile, triggered by
global events that included a Russian default and a subsequent credit crisis
that threatened the survival of a number of high profile hedge funds
[Begin Callout]
"Earnings momentum and a higher certainty of near-term earnings are catalysts
for owning a stock only if we are able to make a longer-term valuation case for
the holding."
Henry Cavanna / J. P. Morgan
[End Callout]
---[17]---
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Manager Roundtable
along with the stability of the global economic expansion. The intervention of
and easing by central bankers around the world stabilized markets and helped to
restore investor confidence, producing the stunning rally in the U.S. stock
market over the past several months. This chain of events reminds us of the
power of central bank easing and the effect of increased liquidity on the
financial markets. It also is instructive to investors, who get too focused on
short-term events at the expense of taking a longer term view.
LAMCO: John Lindenthal, share Oppenheimer's thoughts about the year, please.
LINDENTHAL (OPPENHEIMER -- VALUE): Our value style of investing definitely
lagged during 1998, especially during the recovery phase from the market lows of
early October. The equity market has been primarily momentum driven with a high
degree of emphasis on large capitalization technology stocks. Although the two
technology companies we own (Intel and Nokia) performed well, it is not an area
of concentration for us. Also, the large capitalization consumer nondurables,
especially pharmaceutical companies, performed well and we are underweighted in
that sector. Financial companies, where we are overweighted, did not enjoy such
strength.
[Begin Callout]
"The obvious lesson from this very volatile period is patience and not giving
into emotional decisions."
John Lindenthal / Oppenheimer
[End Callout]
The obvious lesson from this very volatile period is patience and not
giving into emotional decisions. The key is fundamental analysis of individual
companies and acting as an investor and not a near term trader. Also, from an
overview perspective, markets are primarily liquidity driven, and the Federal
Reserve has added an enormous amount of funds to the financial system since
early October.
LAMCO: Mark Donovan, as Boston Partners is the Fund's newest portfolio manager,
this is your first Roundtable. Maybe you can wrap up the discussion about 1998
by sharing your perspective.
DONOVAN (BOSTON PARTNERS -- VALUE): The S&P 500 finished the year with a flurry
of activity in the fourth quarter, ending a year of volatility not experienced
since 1987. The quarter's 21.3 percent gain for the S&P brought the full-year
return to over 28 percent. This year was not only the most volatile since 1987,
it also saw the most dramatic divergence in performance between various styles
of investing, as the large cap growth style beat out all other styles by an
unprecedented margin. Perhaps the lesson to be learned through this period is
that one must be committed to one's investment style, yet be nimble in terms of
one's decision making process.
[Begin Callout]
"The root cause of the lack of breadth in the market in 1998 was a growing
anxiety level surrounding the corporate profit outlook."
Mark Donovan / Boston Partners
[End Callout]
The difference in performance between capitalization sectors was perhaps
the biggest single hurdle faced by active managers in 1998. For large cap value
managers, any deviation in average weighted market capitalization relative to
the S&P 500 was a sure cause of underperformance. As most of the top performing
stocks in this index were large cap growth names, it's no wonder that 98 percent
of the large cap value funds, as tracked by Lipper, Inc. underperformed the S&P
500. One way to understand the influence mega-cap stocks have on performance of
the index is to look at the annual return of the average stock in the S&P 500.
It was just 12.8 percent. On a broader basis, the average New York Stock
Exchange stock, according to one study, was actually down 6 percent in 1998.
LAMCO: Let's turn to the stock market now. What do you think the new year will
bring? What are the one or two key factors investors should watch over the next
few months? Mark Donovan, let's stay with you.
DONOVAN (BOSTON PARTNERS -- VALUE): The root cause of the lack of breadth in the
market in 1998 was a growing anxiety level surrounding the corporate profit
outlook. As we move into 1999, the prospects for earnings growth remain subject
to a great deal of controversy. The "bottom-up" consensus of Wall Street
analysts, whose numbers are almost always too optimistic going into a new
calendar year, suggests a 20 percent growth rate in earnings for 1999.
Meanwhile, "top-down" forecasts from strategists call for much more tepid low
single-digit growth. It is commonplace for top-down forecasts to be more
conservative
---[18]---
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LIBERTY ALL[Star]STAR EQUITY FUND
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Manager Roundtable
than bottom-up forecasts, but the magnitude of the difference for 1999 is
striking. Our own belief is that earnings disappointments will continue to rise,
particularly in the first half, and that the top-down forecasts will prove to be
more realistic. We also believe some of the more prominent disappointments will
come from the mega-cap stocks. We saw some evidence of that in 1998 with
earnings disappointments from Gillette, Disney and Coca-Cola. We are also
finding some companies whose stock lagged the market in 1998, yet possess strong
earnings growth prospects for 1999. General Motors is an example.
LAMCO: What's the outlook at J.P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): In order for 1999 to be a good year, it will be
necessary for the U.S. economy to maintain momentum and not slow too much. It
will also help if Asia, especially Japan, begins to show some signs of recovery.
Even with more moderate growth of about 2.5 percent in real GDP, corporate
profits in the U.S. will show little growth. A moderating economy would permit
the Federal Reserve to ease further, on the order of 50 to 100 basis points,
providing good support to the overall market. Such an action may be necessary
should any financial crisis in Latin America cause global problems. If we see
either a slowing domestic economy or another global crisis developing, we may
see the Federal Reserve step in again to help restore confidence.
[Begin Callout]
"... [with] steady economic growth, low inflation, low interest rates and
continued increases in productivity ... the potential remains for stock prices
in general to continue higher."
Mark Thompson
Wilke/Thompson
[End Callout]
LAMCO: How does Oppenheimer view 1999 prospects?
LINDENTHAL (OPPENHEIMER -- VALUE): Valuations are currently very high, but not
as high as they appear because the indices are dominated by 30 or so large
capitalization companies that are selling at premium multiples of earnings and
book value. The average stock is more reasonably valued. More importantly,
liquidity in the financial system has been very strong and, therefore, going
into 1999 we believe the market will continue to have an upward bias. The
continuation of strong liquidity flows as well as the overall trend in interest
rates are key factors for the individual investor to monitor as the year
progresses.
[Begin Callout]
"... liquidity in the financial system has been very strong and, therefore,
going into 1999 we believe the market will continue to have an upward bias."
John Lindenthal / Oppenheimer
[End Callout]
LAMCO: Let's hear from the growth managers now. Mark Thompson, what are your
thoughts?
THOMPSON (WILKE/THOMPSON -- GROWTH): The stock market, as represented by the S&P
500, is at historically high valuation levels if one looks at measures such as
price/earnings, price/sales and price/book. However, with the combination of
good and steady economic growth, low inflation, low interest rates and continued
increases in productivity and efficiencies across most industries there remains
the potential for stock prices in general to continue higher. We would expect
continued high volatility and an increasingly higher trading range in 1999.
Investors should keep an eye on international economic events to see if
continued weakness in Asia and Brazil begins to spill into the U.S. economy.
Inflation and interest rates should stay low. If the Federal Reserve tightened
for any reason, it would be a caution flag for the stock market. The
Wilke/Thompson investment strategy remains unchanged for 1999. We continue to
conduct extensive research with the objective of investing our clients' funds in
high quality, growth stocks.
LAMCO: How about your thoughts, Susan Byrne?
BYRNE (WESTWOOD -- GROWTH): Our capital markets outlook suggests that the broad
market is slightly overvalued at this level. However, the broad market has
reached these heights as a result of a relatively small number of companies.
Growth is not confined to Internet companies -- there is plenty of opportunity
for growth in sectors that have not fully participated in this rally. As far as
key things to watch in 1999, our capital markets model focuses on traditional
barometers such as GDP growth, corporate profits,
---[19]---
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LIBERTY ALL[Star]STAR EQUITY FUND
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Manager Roundtable
[Begin Callout]
"Investors should keep an eye on international economic events to see if
continued weakness in Asia and Brazil begins to spill into the U.S. economy."
Mark Thompson
Wilke/Thompson
[End Callout]
inflation and interest rates. We think of these things within the context of
various scenarios that encompass events that are happening around us. You can
never predict what world event will influence markets. For example, there was
the Mexican currency crisis in 1994, Asian Contagion in 1997 and the Russian
default in 1998. We can only be sure that one will happen! One big concern is
Latin America and its inability to stabilize its currencies. This is worth
watching, along with the reforms taking place in Southeast Asia.
LAMCO: Good thoughts, all. In terms of specific stocks, perhaps you could focus
on one or two that you like right now. Mark Thompson, why don't you lead off?
THOMPSON (WILKE/THOMPSON -- GROWTH): MSC Industrial Direct is a well-managed
company in a highly fragmented and consolidating industry. The company sells all
kinds of industrial products from screws to drill presses to thousands of
customers. The company should grow its earnings 20 to 30 percent in a low
single-digit growth industry.
Best Software makes business software packages that are used by small to
mid-sized businesses to manage their physical and human assets. The company's
products are made to run on and integrate with Microsoft software and Microsoft
NT and SQL server products. These products have robust growth potential as they
provide small and mid-sized companies with the computing power that previously
was only available to large enterprises. Best Software should grow its earnings
25 to 30 percent annually over the next five years.
LAMCO: Susan Byrne, what is Westwood keeping its eye on?
BYRNE (WESTWOOD -- GROWTH): Oracle, the world's largest provider of database
software, is moving away from a client/server model and toward an
Internet-centric model. As more organizations expand their web sites with
e-commerce capabilities and turn to business-to-business transactions, databases
become more important. The new 8i database offering is positioning Oracle as a
key provider of software infrastructure to internet businesses and traditional
businesses with a web presence.
America Online, the world leader in branded interactive services and
content, is expanding its sphere of influence from telephony to commerce and
financial services. America Online is helping to define how the internet will
impact consumers and has established itself as an e-commerce leader as it drives
large customer traffic flows to cyberstore sites, expands content and attracts
advertising dollars. With the acquisition of Netscape, America Online has the
technical capability to deliver systems required to construct reliable, secure
online stores for its customers.
LAMCO: Mark Donovan, tell us what Boston Partners is watching.
DONOVAN (BOSTON PARTNERS -- VALUE): We are very optimistic regarding the
prospects for Aetna and CIGNA, two companies with remarkably similar profiles.
Both companies have transitioned from multi-line insurance companies to employee
benefit services companies with a particular emphasis on managed health care.
CIGNA has just announced its intention to sell its property-casualty insurance
segment to Bermuda-based ACE Ltd., whereas Aetna's move out of property-casualty
insurance occurred in 1996. Both have made significant acquisitions in the
managed health care business, where we believe pricing trends should be strong
in 1999 and volumes should continue to show solid growth. Both stocks offer very
compelling value.
[Begin Callout]
"Growth is not confined to Internet companies -- there is plenty of opportunity
for growth in sectors that have not fully participated in this rally."
Susan Byrne / Westwood
[End Callout]
LAMCO: John Lindenthal, what does Oppenheimer like?
LINDENTHAL (OPPENHEIMER -- VALUE): Our largest position is Citigroup, which was
created by the merger of Citibank and Travelers. Although the merger got off to
---[20]---
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LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Manager Roundtable
a slow start, it makes strategic and economic sense to combine the resources of
these two outstanding financial companies. Management is experienced and
motivated to position the company on a global basis.
Another financial company that is well positioned is EXEL Ltd. EXEL is an
insurance company headquartered in Bermuda, where low taxes and less regulation
give them a competitive advantage over domestic competition. In addition, EXEL
has an outstanding balance sheet, generates substantial excess cash flow, and
management has a significant stake in the business.
[Begin Callout]
"In order for 1999 to be a good year, it will be necessary for the U.S. economy
to maintain momentum and not slow too much."
Henry Cavanna / J. P. Morgan
[End Callout]
LAMCO: Henry Cavanna, how about J.P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): Union Pacific and Rohm & Haas are two stocks
whose prospects we like over the next year. Union Pacific has overcome massive
operational problems associated with integrating the acquisition of Southern
Pacific and is well on its way to reestablishing the value of its franchise and
rail cost advantage versus other means of transportation. Earnings should
improve materially in 1999 and 2000 through a combination of reduced expenses,
recapturing lost market share and exploiting post merger synergies. Rohm & Haas
is a high quality specialty chemical company that is very undervalued. Earnings
should continue to grow, driven by volume increases and cost reductions. Cost
reductions should fall to the bottom line due to the performance nature of their
business. The company also continues to expand through bolt-on acquisitions in
electronic chemicals and performance polymers.
LAMCO: Many thanks to all for sharing some interesting thoughts with the Fund's
shareholders.
---[21]---
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................................................................................
Schedule of Investments
As of December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS (97.4%) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
AEROSPACE & DEFENSE (1.9%)
Boeing Co. 292,700 $ 9,549,338
Lockheed Martin Corp. 192,700 16,331,325
---------------
25,880,663
---------------
AUTOS, TIRES & ACCESSORIES (2.0%)
DaimlerChrysler AG (a) 85,850 8,246,966
Eaton Corp. 16,800 1,187,550
Ford Motor Co. 152,700 8,961,581
General Motors Corp. 69,400 4,966,437
Lear Corp. (a) 78,700 3,029,950
---------------
26,392,484
---------------
BANKS (4.2%)
ABN AMRO Holding NV ADR 173,765 3,779,381
Astoria Financial Corp. 52,700 2,411,025
BankAmerica Corp. 117,634 7,072,744
Bankers Trust Co. 33,800 2,887,788
First Union Corp. 284,100 17,276,831
Fleet Financial Group, Inc. 239,400 10,698,188
Washington Mutual, Inc. 93,100 3,555,256
Wells Fargo &Co. 223,000 8,906,062
---------------
56,587,275
---------------
BROADCASTING & CABLE (0.3%)
Chancellor Media Corp. (a) 95,100 4,552,912
---------------
BUSINESS & CONSUMER SERVICES (3.7%)
America Online, Inc. (a) 43,000 6,670,375
Apollo Group, Inc. (a) 136,900 4,637,487
Catalina Marketing Corp. (a) 71,100 4,861,463
Cendant Corp. (a) 158,400 3,019,500
Cintas Corp. 140,750 9,914,078
IMS Health, Inc. 103,700 7,822,869
Quintiles Transnational Corp. (a) 73,400 3,917,725
Robert Half International, Inc. (a) 137,200 6,131,125
Service Corp. International 79,600 3,029,775
---------------
50,004,397
---------------
CHEMICALS (1.6%)
Monsanto Co. 356,100 16,914,750
Rohm & Haas Co. 75,900 2,286,488
</TABLE>
See Notes to Schedule of Investments.
---[22]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
CHEMICALS (CONT.)
Union Carbide Corp. 49,600 $ 2,108,000
---------------
21,309,238
---------------
COMMUNICATIONS EQUIPMENT (3.6%)
Black Box Corp. (a) 96,400 3,651,150
Cisco Systems, Inc. (a) 139,850 12,979,828
CommScope, Inc. (a) 106,033 1,782,680
Lucent Technologies, Inc. 74,100 8,151,000
Nokia Corp. ADR 120,000 14,452,500
Northern Telecom Limited 152,400 7,639,050
---------------
48,656,208
---------------
COMPUTER & BUSINESS EQUIPMENT (4.4%)
Compaq Computer Corp. 380,500 15,957,219
EMC Corp. (a) 80,100 6,808,500
Hewlett-Packard Co. 111,400 7,610,012
Ingram Micro, Inc., Class A (a) 72,700 2,535,413
International Business Machines Corp. 88,675 16,382,706
Solectron Corp. (a) 21,900 2,035,331
Sun Microsystems, Inc. (a) 50,700 4,341,188
Tech Data Corp. (a) 114,100 4,592,525
---------------
60,262,894
---------------
COMPUTER SERVICES & SOFTWARE (6.4%)
Acxiom Corp. (a) 208,400 6,460,400
Autodesk, Inc. 13,300 567,744
Automatic Data Processing, Inc. 94,900 7,609,794
Best Software, Inc. (a) 146,300 3,474,625
Electronic Arts, Inc. (a) 113,200 6,353,350
Fiserv, Inc. (a) 153,250 7,882,797
HBO & Co. 144,800 4,153,950
J. D. Edwards & Co. (a) 171,250 4,859,218
Microsoft Corp. (a) 108,100 14,992,119
Oracle Corp. (a) 121,800 5,252,625
Policy Management Systems Corp. (a) 168,400 8,504,200
Sterling Commerce, Inc. (a) 104,200 4,689,000
Sterling Software, Inc. (a) 296,900 8,034,856
Wang Laboratories, Inc. (a) 140,000 3,885,000
---------------
86,719,678
---------------
</TABLE>
See Notes to Schedule of Investments.
---[23]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
CONSUMER PRODUCTS (2.6%)
Avon Products, Inc. 270,000 $ 11,947,500
Hasbro, Inc. 61,900 2,236,137
Kimberly-Clark Corp. 47,700 2,599,650
Philip Morris Companies, Inc. 189,300 10,127,550
Procter & Gamble Co. 53,800 4,912,613
Ralston Purina Co. 83,900 2,716,263
---------------
34,539,713
---------------
DIVERSIFIED (2.5%)
Allied Signal, Inc. 57,000 2,525,812
Cooper Industries, Inc. 21,400 1,020,513
General Electric Co. 80,000 8,165,000
Loews Corp. 58,400 5,737,800
Minnesota Mining & Manufacturing Co. 60,000 4,267,500
The Seagram Co., Ltd. 69,000 2,622,000
Tyco International Ltd. 118,284 8,923,049
---------------
33,261,674
---------------
DRUGS & HEALTH CARE (8.5%)
Abbott Laboratories 105,500 5,169,500
Alza Corp. (a) 85,900 4,488,275
American Home Products Corp. 211,500 11,910,094
Bristol-Myers Squibb Co. 48,500 6,489,906
Cardinal Health, Inc. 116,605 8,847,404
Elan Corp., ADR (a) 125,450 8,726,616
Eli Lilly & Co. 128,500 11,420,437
Forest Laboratories, Inc. (a) 29,000 1,542,438
Genzyme Corp. (a) 113,900 5,666,525
HEALTHSOUTH Corp. (a) 143,200 2,210,650
Humana, Inc. (a) 112,400 2,002,125
Merck & Co., Inc. 43,600 6,439,175
Omnicare, Inc. 131,600 4,573,100
Pfizer, Inc. 72,050 9,037,772
Pharmacia & Upjohn, Inc. 139,000 7,870,875
Quorum Health Group, Inc. (a) 195,500 2,529,281
SmithKline Beecham PLC ADR 117,600 8,173,200
Steris Corp. (a) 233,900 6,651,531
Warner-Lambert Co. 22,200 1,669,163
---------------
115,418,067
---------------
</TABLE>
See Notes to Schedule of Investments.
---[24]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
ELECTRIC & GAS UTILITIES (2.5%)
Central & South West Corp. 55,200 $ 1,514,550
Columbia Energy Group 24,000 1,386,000
Florida Progress Corp. 80,000 3,585,000
Houston Industries, Inc. 234,800 7,542,950
Northern States Power Co. 86,100 2,389,275
P G & ECorp. 109,700 3,455,550
PP&L Resources, Inc. 147,000 4,097,625
Peco Energy Co. 186,900 7,779,712
Texas Utilities Co. 41,800 1,951,538
---------------
33,702,200
---------------
ELECTRONICS & ELECTRICAL EQUIPMENT (2.8%)
Intel Corp. 104,200 12,354,212
International Game Technology 138,200 3,359,988
Linear Technology Corp. 86,200 7,720,288
Maxim Integrated Products, Inc. (a) 92,100 4,023,619
Molex, Inc. 145,475 5,546,234
Perkin-Elmer Corp. 32,400 3,161,025
Texas Instruments, Inc. 12,300 1,052,419
---------------
37,217,785
---------------
FINANCIAL SERVICES (7.0%)
American Express Co. 16,100 1,646,225
Citigroup, Inc. 698,100 34,555,950
The CIT Group, Inc. 88,300 2,809,044
Countrywide Credit Industries, Inc. 150,000 7,528,125
Fannie Mae 27,600 2,042,400
Freddie Mac 397,900 25,639,681
Morgan Stanley Dean Witter & Co. 158,100 11,225,100
Paychex, Inc. 179,700 9,243,319
---------------
94,689,844
---------------
FOOD, BEVERAGE & RESTAURANTS (4.4%)
Anheuser-Busch Companies, Inc. 159,600 10,473,750
Campbell Soup Co. 132,900 7,309,500
Diageo PLC ADR 110,000 5,087,500
Dole Food Company, Inc. 150,000 4,500,000
Dreyers Grand Ice Cream, Inc. 266,600 4,032,325
General Mills, Inc. 50,300 3,910,825
International Home Foods, Inc. (a) 206,900 3,491,437
</TABLE>
See Notes to Schedule of Investments.
---[25]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
FOOD, BEVERAGE & RESTAURANTS (CONT.)
Nabisco Holdings Corp. 154,900 $ 6,428,350
PepsiCo, Inc. 130,800 5,354,625
Starbucks Corp. (a) 163,300 9,165,213
---------------
59,753,525
---------------
HOTELS & ENTERTAINMENT/LEISURE (0.8%)
Marriott International, Inc., Class A 174,200 5,051,800
Mirage Resorts, Inc. (a) 108,300 1,617,731
Time Warner, Inc. 76,000 4,716,750
---------------
11,386,281
---------------
INDUSTRIAL EQUIPMENT (2.1%)
Caterpillar, Inc. 130,000 5,980,000
Deere & Co. 100,300 3,322,438
Dover Corp. 110,000 4,028,750
Ingersoll-Rand Co. 188,300 8,838,331
MSC Industrial Direct Co., Inc. (a) 260,200 5,887,025
---------------
28,056,544
---------------
INSURANCE (8.6%)
ACE Limited 273,200 9,408,325
Aetna, Inc. 70,300 5,527,338
AFLAC, Inc. 375,000 16,500,000
Allmerica Financial Corp. 127,600 7,384,850
Allstate Corp. 185,200 7,153,350
Ambac Financial Group, Inc. 20,500 1,233,844
American International Group, Inc. 13,300 1,285,113
CIGNA Corp. 198,500 15,346,531
Conseco, Inc. 355,300 10,858,856
EXEL Limited 220,000 16,500,000
Marsh & McLennan Companies, Inc. 63,500 3,710,781
Progressive Corp. 50,000 8,468,750
Transamerica Corp. 85,000 9,817,500
UNUM Corp. 58,800 3,432,450
---------------
116,627,688
---------------
METALS & MINING (0.8%)
Allegheny Teledyne, Inc. 150,100 3,067,669
Aluminum Company of America 104,800 7,814,150
---------------
10,881,819
---------------
</TABLE>
See Notes to Schedule of Investments.
---[26]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
OIL & GAS (4.6%)
Apache Corp. 135,000 $ 3,417,187
Atlantic Richfield Co. 174,900 11,412,225
Conoco, Inc. (a) 318,700 6,652,862
Elf Aquitaine ADR 147,600 8,357,850
Halliburton Co. 27,400 811,725
Mobil Corp. 79,900 6,961,287
PennzEnergy Co. 225,400 3,676,838
Pennzoil Quaker State Co. (a) 214,500 3,163,875
Phillips Petroleum Co. 47,600 2,028,950
Royal Dutch Petroleum Co. 80,062 3,832,968
Texaco, Inc. 135,900 7,185,713
Tosco Corp. 155,900 4,033,913
---------------
61,535,393
---------------
PAPER (0.9%)
Georgia-Pacific Corp. 65,900 3,859,269
Temple-Inland, Inc. 149,500 8,867,219
---------------
12,726,488
---------------
POLLUTION CONTROL (1.3%)
Waste Management, Inc. 387,955 18,088,402
---------------
PUBLISHING (0.4%)
R.R. Donnelley & Sons Co. 120,000 5,257,500
---------------
REAL ESTATE INVESTMENT TRUSTS (0.8%)
Crescent Real Estate Equities Co. 134,700 3,098,100
Starwood Hotels & Resorts 187,300 4,249,369
Vornado Realty Trust 105,800 3,570,750
---------------
10,918,219
---------------
RETAIL TRADE (10.2%)
Albertson's, Inc. 151,400 9,642,287
American Stores Co. 71,800 2,652,112
AnnTaylor Stores Corp. (a) 104,900 4,136,994
CDW Computer Centers, Inc. (a) 71,550 6,864,328
Circuit City Stores, Inc. 101,400 5,063,662
CVS Corp. 294,950 16,222,250
Dayton Hudson Corp. 176,600 9,580,550
Family Dollar Stores, Inc. 244,200 5,372,400
Federated Department Stores, Inc. (a) 47,100 2,051,793
Fred Meyer, Inc. (a) 137,190 8,265,696
</TABLE>
See Notes to Schedule of Investments.
---[27]---
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................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHARES MARKET VALUE
===============================================================================================
<S> <C> <C>
RETAIL TRADE (CONT.)
Harcourt General, Inc. 83,700 $ 4,451,793
Home Depot, Inc. 145,450 8,899,721
Kohl's Corp. (a) 132,400 8,134,325
May Department Stores Co. 150,000 9,056,250
Rite Aid Corp. 98,600 4,886,863
Safeway, Inc. (a) 136,900 8,342,344
Staples, Inc. (a) 296,100 12,935,869
Toys R Us Inc. (a) 69,800 1,177,875
Walgreen Co. 143,000 8,374,438
Wal-Mart Stores, Inc. 24,500 1,995,219
----------------
138,106,769
----------------
TELECOMMUNICATIONS (7.1%)
AT&T Corp. 275,500 20,731,375
Bell Atlantic Corp. 169,500 9,629,719
GTE Corp. 170,400 11,491,350
SBC Communications, Inc. 197,600 10,596,300
Sprint Corp. 170,000 14,301,250
Sprint Corp. (PCS Group)(a) 85,000 1,965,625
MCI WorldCom, Inc. (a) 370,853 26,608,703
----------------
95,324,322
----------------
TRANSPORTATION (1.4%)
AMR Corp. (a) 140,000 8,312,500
Delta Air Lines, Inc. 68,300 3,551,600
Union Pacific Corp. 144,900 6,529,556
----------------
18,393,656
----------------
TOTAL COMMON STOCKS (COST $905,925,520) $1,316,251,638
----------------
PREFERRED STOCK (0.4%)
ELECTRIC UTILITIES (0.4%)
Houston Industries 7% Convertible
(Cost $2,877,586) 51,200 5,446,400
----------------
</TABLE>
See Notes to Schedule of Investments.
---[28]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Schedule of Investments
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS (3.5%) INTEREST MATURITY PAR MARKET
COMMERCIAL PAPER (1.2%) RATE DATE VALUE VALUE
---------- --------- ------------- ----------------
<S> <C> <C> <C> <C>
CIT Group Holdings 5.99% 01/07/99 $ 5,500,000 $ 5,494,509
CIT Group Holdings 5.60 01/12/99 5,600,000 5,590,418
Household Finance 4.75 01/04/99 5,000,000 4,998,021
--------------
TOTAL COMMERCIAL PAPER (COST $16,082,948) 16,082,948
--------------
REPURCHASE AGREEMENT (2.3%)
ABN AMRO Chicago Corp., Repurchase Agreement dated 12/31/98, 4.75% to be
repurchased at $31,331,527 on 1/4/99, collateralized by U.S. Treasury notes with
various maturities to 2015, with a current market value of $31,965,842. 31,315,000 31,315,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $47,397,948) 47,397,948
--------------
TOTAL INVESTMENTS (101.3%) (COST $956,201,054) (b) 1,369,095,986
OTHER ASSETS AND LIABILITIES, NET (-1.3%) (18,005,676)
--------------
NET ASSETS (100.0%) $1,351,090,310
==============
NET ASSET VALUE PER SHARE (94,997,900 SHARES OUTSTANDING) $14.22
==============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security
(b) The cost of investments for federal income tax purposes is $958,662,995.
Gross unrealized appreciation and depreciation of investments at
December 31, 1998 is as follows:
Gross unrealized appreciation $447,164,549
Gross unrealized depreciation (36,731,558)
------------
Net unrealized appreciation $410,432,991
============
</TABLE>
Acronym Name
- ----------- ---------------------------
ADR American Depository Receipt
See Notes to Financial Statements.
---[29]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments at market value (identified cost $956,201,054) $1,369,095,986
Receivable for investments sold 19,290,643
Dividends and interest receivable 1,231,501
Other assets 48,201
--------------
TOTAL ASSETS 1,389,666,331
--------------
LIABILITIES:
Payable for investments purchased 23,086,854
Distributions payable to shareholders 14,180,093
Payable due to custodian bank 244,831
Management fees payable 754,532
Administrative and bookkeeping fees payable 212,541
Accrued expenses 97,170
--------------
TOTAL LIABILITIES 38,576,021
--------------
NET ASSETS $1,351,090,310
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of
beneficial interest without par value authorized,
94,997,900 shares outstanding) $ 906,262,053
Undistributed net investment income 2
Accumulated net realized gains on investments
less distributions 31,933,323
Net unrealized appreciation on investments 412,894,932
--------------
TOTAL NET ASSETS APPLICABLE
TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST
($14.22 PER SHARE) $1,351,090,310
==============
</TABLE>
See Notes to Financial Statements.
---[30]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Statement of Operations
Year ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 15,879,693
Interest 1,344,951
------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $148,975) 17,224,644
EXPENSES:
Management fees $ 8,877,784
Administrative fee 2,218,502
Bookkeeping fee 259,824
Custodian and transfer agent fees 250,906
Proxy and shareholder communication expense 291,377
Printing expense 133,240
Legal and audit fees 56,014
Trustees' fees and expense 67,675
Miscellaneous expense 185,311
------------
TOTAL EXPENSES 12,340,633
------------
NET INVESTMENT INCOME 4,884,011
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investment transactions:
Proceeds from sales 999,550,922
Cost of investments sold 890,776,814
------------
Net realized gains on investment transactions 108,774,108
Net unrealized appreciation on investments:
Beginning of year 307,707,985
End of year 412,894,932
------------
Change in unrealized appreciation-net 105,186,947
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $218,845,066
============
</TABLE>
See Notes to Financial Statements.
---[31]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,884,011 $ 4,205,838
Net realized gains on investment
transactions, after provision for
federal income tax for 1997 only 108,774,108 203,853,412
Change in unrealized appreciation-net 105,186,947 16,879,396
--------------- ---------------
Net increase in net assets resulting
from operations 218,845,066 224,938,646
--------------- ---------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (4,883,968) (4,205,838)
Net realized gains on investments (122,031,385) (107,028,243)
--------------- ---------------
Total distributions (126,915,353) (111,234,081)
--------------- ---------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share
transactions 108,821,914 48,707,853
--------------- ---------------
Total increase in net assets 200,751,627 162,412,418
NET ASSETS:
Beginning of year 1,150,338,683 987,926,265
--------------- ---------------
End of year $ 1,351,090,310 $ 1,150,338,683
=============== ===============
</TABLE>
See Notes to Financial Statements.
---[32]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $13.32 $11.95 $11.03 $ 9.26 $10.40
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.05 0.05 0.08 0.10 0.11
Net realized and unrealized
gains (losses) on investments 2.35 3.01(a) 2.15(a) 2.71 (0.20)
Provision for federal income tax -- (0.36) (0.13) -- --
------- ------- ------- ------- -------
Total from Investment Operations 2.40 2.70 2.10 2.81 (0.09)
------- ------- ------- ------- -------
Less Distributions from:
Net investment income (0.05) (0.05) (0.08) (0.10) (0.12)
Realized capital gains (1.35) (1.28) (1.10) (0.94) (0.52)
Paid-in capital -- -- -- -- (0.36)
------- ------- ------- ------- -------
Total Distributions (1.40) (1.33) (1.18) (1.04) (1.00)
------- ------- ------- ------- -------
Change due to rights offering (b) (0.10) -- -- -- (0.05)
------- ------- ------- ------- -------
Net asset value at end of year $14.22 $13.32 $11.95 $11.03 $ 9.26
======= ======= ======= ======= =======
Market price at end of year $12.938 $13.313 $11.250 $10.875 $ 8.500
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 19.8% 26.6% 21.7% 31.8% (0.8)%
Based on market price 9.1% 34.4% 16.2% 41.4% (14.9)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $1,351 $1,150 $988 $872 $710
Ratio of expenses to average net assets 1.00% 1.01% 1.03% 1.06% 1.07%
Ratio of net investment income to
average net assets 0.39% 0.38% 0.73% 0.92% 1.16%
Portfolio turnover rate 76% 99% 70% 54% 44%
</TABLE>
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offerings 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.
See Notes to Financial Statements.
---[33]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Notes to Financial Statements
December 31, 1998
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 -- The Fund 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 assets. The Manager pays
each Portfolio Manager a portfolio management fee at an annual rate of 0.40% of
the average weekly net assets 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 assets. 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. The annual fund management and administrative fees are 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.
---[34]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Notes to Financial Statements
NOTE 3. CAPITAL TRANSACTIONS
In a rights offering commencing March 25, 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 years ended December 31, 1998 and December
31, 1997, distributions in the amount of $53,655,255 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
4,317,097 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 year ended December 31, 1998 were $935,796,591 and
$999,550,922, respectively.
The Fund may enter into repuchase 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.
---[35]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Independent Auditors' Report
[KPMG Peat Marwick LLP logo]
The Board of Trustees and Shareholders
Liberty All-Star Equity Fund:
We have audited the accompanying statement of assets and liabilities of Liberty
All-Star Equity Fund (the Fund), including the schedule of investments, as of
December 31, 1998, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Liberty All-Star Equity Fund as of December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 12, 1999
---[36]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Automatic Dividend Reinvestment & Cash Purchase Plan
Under the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), shareholders may elect to participate and have all their Fund
dividends and distributions automatically reinvested by State Street Bank and
Trust Company, as agent for participants in the Plan (the "Plan Agent"), in
additional shares of the Fund. For further information and enrollment forms,
call Investor Assistance at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9
a.m. and 5 p.m. Eastern Time.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee can participate in the Plan only if their brokerage firm, bank or
nominee is able to do so on their behalf. Shareholders participating in the Plan
through a brokerage firm may not be able to transfer their shares to another
brokerage firm and continue to participate in the Plan.
Under the Plan, distributions declared payable in shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional shares valued at the lower of market value or net
asset value per share on the valuation date for the distribution (but not at a
discount of more than 5 percent from market price). Distributions declared
payable only in cash will be reinvested for the accounts of participants in the
Plan in additional shares purchased by the Plan Agent on the open market at
prevailing market prices. If, prior to the Plan Agent's completion of such open
market purchases, the market price of a share equals or exceeds its net asset
value, the remainder of the distribution will be paid in newly issued shares
valued at net asset value (but not at a discount of more than 5% from market
price). Dividends and distributions are subject to taxation, whether received in
cash or in shares.
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in shares of the Fund purchased
on the open market. These voluntary cash payments will be invested on or shortly
after the 15th day of each calendar month, and voluntary payments should be sent
so as to be received by the Plan Agent no later than five business days before
the next investment date. Barring suspension of trading, voluntary cash payments
will be invested within 30 days of receipt. A participant may withdraw a
voluntary cash payment by written notice received by the Plan Agent at least 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There is no charge to participants for reinvesting distributions pursuant
to the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written
notice to the Plan Agent, State Street Bank and Trust Company, P.O. Box 8200,
Boston, MA 02266-8200. Such termination will be effective immediately if
received not less than 10 days prior to the record date for a dividend or
distribution; otherwise it will be effective on the first business day after the
payment date of such dividend or distribution. On termination, participants may
either have certificates for the Fund shares in their Plan accounts delivered to
them or have the Plan Agent sell such shares in the open market and deliver the
proceeds, less a $2.50 fee plus brokerage commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
---[37]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Tax Information
All 1998 distributions whether received in cash or shares of the Fund consist of
the following:
(1) ordinary dividend income and
(2) long-term capital gains distributions
Below is a table that details the breakdown of each 1998 distribution for
federal income tax purposes.
TAX STATUS OF 1998 DISTRIBUTIONS (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
ORDINARY INCOME
---------------------------------------------
NET SHORT-TERM LONG-TERM
AMOUNT INVESTMENT CAPITAL CAPITAL
DATE PAID PER SHARE INCOME GAINS GAINS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
03/23/98 $0.35 -- 57.76% 42.24%
- ----------------------------------------------------------------------------------------------
07/06/98 0.37 14.34% -- 85.66%
- ----------------------------------------------------------------------------------------------
10/05/98 0.34 -- -- 100.00%
- ----------------------------------------------------------------------------------------------
01/04/99 0.34 -- -- 100.00%
</TABLE>
FOR CORPORATE SHAREHOLDERS
- --------------------------------------------------------------------------------
58% of the ordinary income dividends qualify for the 70% dividend received
deduction available for corporations for the year ended December 31, 1998.
---[38]---
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Notes
<PAGE>
LIBERTY ALL[Star]STAR EQUITY FUND
................................................................................
Notes
<PAGE>
[back cover]
[logo: LIBERTY [logo: "ASG
ALL[Star]STAR Listed NYSE
------------- THE NEW YORK STOCK EXCHANGE"]
EQUITY FUND]
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*
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] LBTCM-AR-99
