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[LOGO] LIBERTY
ALL*STAR
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EQUITY FUND
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GROWTH
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CONSISTENCY
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OBJECTIVITY
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VALUE
ANNUAL REPORT 1999
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A SINGLE INVESTMENT...
A DIVERSIFIED PORTFOLIO
Only one mutual fund offers:
o A diversified, multi-managed portfolio of growth and value stocks
o Exposure to all of the industry sectors that make the U.S. economy the
world's most dynamic
o Access to institutional-quality portfolio managers
o Objective and ongoing manager evaluation
o A quarterly fixed distribution policy
o The power of more than $1.3 billion in assets
o Listing on the New York Stock Exchange (ticker symbol: USA)
LIBERTY ALL-STAR EQUITY FUND
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<PAGE>
President's Letter
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Fellow Shareholders: February 2000
The net asset value (NAV) of a common share of the Fund increased during the
fourth quarter from $12.98 to $14.02, after deducting the quarter's distribution
of 34 cents. The Fund's NAV increase of 11.1 percent exceeded the Lipper Growth
and Income Mutual Fund Average return of 10.9 percent, its primary benchmark,
but trailed the S&P 500 Index return of 14.9 percent. The market price for a
share of the Fund traded in a range of $10.75 to $12.50 before closing the
quarter at $11.063. The ending price represented a discount to NAV of 21.1
percent compared with a discount to NAV of 9.5 percent at the end of the third
quarter.
<TABLE>
<CAPTION>
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Short-Term Summary Fourth
through December 31, 1999 Quarter Full Year
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<S> <C> <C>
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at Net Asset Value 11.1% 9.6%
Shares Valued at Net Asset Value with Dividends Reinvested 11.4% 10.2%
Shares Valued at Market Price with Dividends Reinvested (2.9)% (4.4)%
Fund's Closing Market Price Range $10.813 to $12.438 $10.813 to $13.875
Discount Range 22.8% to 8.4% 22.8% to 4.0%
Lipper Growth and Income Mutual Fund Average 10.9% 13.8%
S&P 500 Index 14.9% 21.0%
</TABLE>
<TABLE>
<CAPTION>
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Annualized Rates of Return
Long-Term Performance Summary ---------------------------
through December 31, 1999 3 Year 5 Year 10 Year
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<S> <C> <C> <C>
LIBERTY ALL-STAR EQUITY FUND
Shares Valued at Net Asset Value ............................. 18.5% 21.5% 15.9%
Shares Valued at Net Asset Value with Dividends Reinvested ... 18.7 21.8 16.2
Shares Valued at Market Price with Dividends Reinvested ...... 11.9 18.2 15.2
Lipper Growth and Income Mutual Fund Average .................. 18.0 21.3 14.4
S&P 500 Index ................................................. 27.6 28.6 18.2
</TABLE>
Figures shown for the Fund and the Lipper Growth and Income Mutual Fund Average
are total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in all the
Fund's rights offerings were exercised. Figures shown for the unmanaged S&P 500
Index are total returns, including income.
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The outperformance of the Fund's NAV when compared to the Fund's market price
during the fourth quarter resulted in the widening of the Fund's discount from
9.5 percent to 21.1 percent. Although closed-end fund discounts fluctuate
year-to-year, the recent widening has been more significant for the Fund than in
the recent past. Financial observers have noted that the widening of the
discount for some closed-end funds was more acute during the fourth quarter of
1999. Reasons mentioned have ranged from Y2K liquidity preferences to the
extraordinary dispersion in performance between growth and technology oriented
funds compared to more conservative blended style core funds, such as All-Star.
Although we can only
1
<PAGE>
President's Letter -- continued
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speculate as to the validity of such assertions, we can say with certainty that
we are keenly aware of the issue and are closely monitoring it as the new year
unfolds.
The major stock market indices rebounded strongly during the fourth quarter
with leadership again coming from the technology sector. The exceptional
strength in that sector gave a distorted picture of how a majority of stocks
performed. The technology sector of the S&P 500 rose 34 percent in the quarter,
contributing more than half of the Index's 15 percent return. Returns for the
year showed a similar pattern, as the technology sector rose 74 percent,
accounting for more than two-thirds of the S&P 500's 21 percent return. The
momentum of that sector was so strong that it resulted in a market rise where
two-thirds of the stocks in the S&P 500 actually under-performed the Index as a
whole for the year.
The narrow market leadership is also evident when you examine how high
quality companies were perceived during 1999. The following Merrill Lynch study
shows how stocks performed based upon Standard and Poor's (S&P) quality ratings.
Ratings assigned to companies range from the lowest quality, D, to the highest
quality, A+. One important criterion used by S&P in determining a company's
rating is earnings growth. The following chart shows stock returns for the past
two calendar years based upon S&P stock quality ratings.
Stock Price Performance by Quality Rating *
[The following table was depicted as a bar chart in the printed material.]
A+ A A- B+ B B- C & D
1998 19.8% 12.1% 9.3% 5.0% 8.5% -10.9% -4.4%
1999 -1.6% -6.5% -5.1% 7.1% 12.3% 20.6% 71.4%
* Source Merrill Lynch & Co.
As you can see from the chart above, having a high quality portfolio of
stocks during 1999 resulted in poor relative and absolute performance compared
to that of lower quality stocks. Looking back at 1998, relative strength was
with stocks of higher quality, so portfolios largely concentrated in such stocks
were nicely rewarded. Such was the case with All-Star, which has maintained a
strategy of owning high quality stocks since the Fund's inception over 12 years
ago. The Fund was designed as a core equity investment and therefore has a bias
toward stocks of high quality companies.
Based on companies ranked by S&P, more than two thirds of All-Star's holdings
were rated B+ or higher during the last two calendar years. Although the recent
performance advantage of lower quality stocks has depressed relative results in
the short-term, the Fund's high quality orientation may be more appropriate for
those investors who view All-Star as their long-term core equity holding.
In addition to the challenges created by a narrow growth oriented market, the
Fund's results were negatively impacted
2
<PAGE>
President's Letter -- continued
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by the performance of one of the Fund's growth managers during the first three
quarters of 1999. The Trustees approved LAMCO's recommendation to replace that
manager on November 1, 1999. Although the replaced manager was the Fund's best
performer during 1998, his deterioration in performance during 1999 coupled with
other key factors (which LAMCO monitors on an ongoing basis), resulted in the
termination decision. Subsequent to the replacement, we began to see an
improvement in relative performance, as the Fund outperformed the Lipper Growth
and Income Average during the fourth quarter. Unfortunately, results for all of
1999 trailed that benchmark due to the Fund's underperformance during the first
nine months of the year. Results during 1999 were particularly disappointing
considering the Fund outperformed the Lipper Growth and Income Average during
1998 by 4.2 percent. LAMCO, from time to time, has to replace portfolio managers
due to the dynamic nature of the investment management industry. This is part of
LAMCO's ongoing management responsibility and is key to delivering more
consistent, above average long-term results. The Fund's longer-term results
(three, five and ten years) all exceed those of the Lipper Growth and Income
Average.
We hope you find the review of multi-management as practiced by LAMCO, which
begins on page 6, to be of interest. You may also want to read the insightful
comments of our five portfolio managers in this year's Manager Roundtable
(beginning on page 12).
Let me take this opportunity to thank you for your continuing support of the
Fund, and to pledge our continued very best efforts on your behalf as we move
into this exciting new century.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund and
Liberty Asset Management Company
3
<PAGE>
Investment Growth as of December 31, 1999
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[The following table was depicted as a mountain chart in the printed material.]
<--- NEED PLOT POINTS --->
To evaluate NAV performance in All-Star, these values should be used. Each shows
how the NAV has fared by keeping distributions at work in the Fund. The upper
value includes additional investments made through rights offerings in 1992,
1993, 1994 and 1998.
Net asset value of one share of All-Star as of 12/31/99.
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 $75.68 (5.398 shares times the current $14.02 net asset value per
share). Excluding additional investments made through the rights offerings, an
original share has grown to a net asset value of $58.93 (4.203 shares times the
current $14.02 net asset value per share).
Determining investment growth using market price value, an original share,
assuming participation in all of the rights offerings and reinvestment of all
distributions, has grown to a market price value of $59.72 (5.398 shares times
the current $11.063 market price per share).Excluding additional investments
made through the rights offerings, an original share has grown to a market price
value of $46.50 (4.203 shares times the current $11.063 market price per share).
4
<PAGE>
A Table of Per-Share Values, Distributions and Reinvestment
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<TABLE>
<CAPTION>
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Shares Shares
Shares Purchased Acquired Shares NAV(1) Market Price Total Market
Owned At Through Through Owned Per Share Total NAV Per Share Price Of
Beginning Per Share Reinvestment Rights At End At End Of Shares At End Shares
Year Of Year Distributions 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 0.140 - 1.140 $ 7.90 $ 9.01 $ 6.00 $ 6.84
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1988 1.140 0.64 0.107 - 1.247 8.29 10.34 7.25 9.04
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1989 1.247 0.95 0.156 - 1.403 9.58 13.44 8.25 11.57
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1990 1.403 0.90 0.167 - 1.570 8.92 14.00 7.75 12.17
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1991 1.570 1.02 0.171 - 1.741 11.20 19.50 10.75 18.72
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1992 1.741 1.07 0.199 0.179(2) 2.119 10.78 22.84 11.125 23.57
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1993 2.119 1.25(3) 0.266 0.138(2) 2.523 10.40 26.24 11.125 28.07
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1994 2.523 1.00 0.277 0.155(2) 2.955 9.26 27.36 8.50 25.12
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1995 2.955 1.04 0.310 - 3.265 11.03 36.01 10.875 35.51
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1996 3.265 1.31(3) 0.403 - 3.668 11.95 43.83 11.25 41.27
- ------------------------------------------------------------------------------------------------------------------------------------
1997 3.668 1.69(3) 0.501 - 4.169 13.32 55.53 13.313 55.50
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1998 4.169 1.40 0.487 0.173(2) 4.829 14.22 68.67 12.938 62.48
- ------------------------------------------------------------------------------------------------------------------------------------
1999
1st Quarter 4.829 0.34 0.126 - 4.955 13.96 69.17 12.813 63.49
2nd Quarter 4.955 0.37 0.139 - 5.094 14.72 74.98 13.75 70.04
3rd Quarter 5.094 0.34 0.141 - 5.235 12.98 67.95 11.75 61.51
4th Quarter 5.235 0.34 0.163 - 5.398 14.02 75.68 11.063 59.72
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</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>
LAMCO's Multi-Management Program
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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
(x-axis) (y-axis)
-------- --------
5.97 14.46
4.20 15.08
4.95 15.53
6.18 12.60
6.03 17.29
4.97 13.15
3.46 15.19
6.54 10.75
5.61 14.77
2.87 15.00
5.95 15.48
4.75 11.48
5.88 14.42
3.36 14.77
4.86 15.84
4.67 15.49
4.32 18.17
4.08 18.37
3.54 15.55
12.94 7.25
3.96 16.94
3.16 16.02
4.68 14.62
3.99 15.02
2.74 15.57
5.75 14.36
12.28 15.74
2.85 16.31
4.49 12.83
4.53 13.34
7.97 14.48
7.70 14.26
7.40 14.32
5.09 15.50
6.96 13.59
6.49 11.41
5.60 16.73
4.50 14.82
3.46 16.09
6.41 9.75
5.64 12.17
5.08 14.13
4.44 15.60
5.82 14.36
5.66 18.07
3.86 13.50
7.09 13.11
2.54 16.61
9.00 19.06
5.93 13.43
7.60 17.14
5.60 14.28
4.00 15.20
2.31 18.48
8.07 13.03
5.31 13.80
5.17 14.93
6.39 11.44
3.57 16.19
Each dot represents the precise return and consistency of one fund over the past
10 years (January 1, 1990, through December 31, 1999) in the universe of 58
Growth & Income Funds (as listed 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.
All-Star's high return and high consistency combination is well-placed among the
universe of other major growth and income funds.
6
<PAGE>
LAMCO'S Multi-Management Program -- continued
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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:
o A constant focus on a particular style of investing.
o A disciplined investment decision-making process.
o A record of success relative to other managers who practice the same style.
o Continuity among the investment professionals, so that those who have built
the record remain the managers.
o A well-managed, highly responsive organization.
The pie chart below shows the portfolio manager lineup and percentage
allocations to each.
[The following information was depicted as a pie chart in the printed material.]
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%
TCW INVESTMENT MANAGEMENT COMPANY
Growth / Companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
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.
As with anything in investments, circumstances change, so...
7
<PAGE>
LAMCO'S Multi-Management Program -- continued
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Manager Evaluation and, Occasionally, Replacement
...LAMCO conducts continuing evaluation of the portfolio managers. The purpose
is to be sure that each is still the best choice for All-Star. Through frequent
meetings with the portfolio managers, and through qualitative and quantitative
analyses, each is continually evaluated to assure that:
o They are consistently practicing their investment style.
o Their transactions and holdings reflect their style.
o Their organization and investment process continue to support their style.
o Their investment performance is competitive when compared with other
portfolio managers practicing a similar style.
Also, LAMCO is alert to assuring the proficiency of the portfolio manager team.
The objective is to be certain that the team remains an optimal combination,
giving All-Star the full benefits of multi-management. The procedures include:
o Assuring that All-Star's total portfolio has the proper investment
characteristics.
o Researching new investment managers as possible future portfolio managers.
o Making portfolio manager changes when necessary. Nine portfolio managers
have been replaced from inception in 1986 through 1999.
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>
LAMCO's Multi-Management Program -- continued
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Portfolio Managers/Portfolio Characteristics
THE FUND'S FIVE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE ARE:
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Companies with low price-to-earnings and price-to-book ratios where a catalyst
for positive change has been identified.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Companies diversified across all sectors that are undervalued relative to 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.
TCW INVESTMENT MANAGEMENT COMPANY*
Growth companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
WESTWOOD MANAGEMENT CORPORATION
Growth companies selling at reasonable valuations based on the firm's earnings
projections, which are not yet reflected in consensus estimates.
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.
PORTFOLIO CHARACTERISTICS
AS OF DECEMBER 31, 1999
(UNAUDITED)
INVESTMENT STYLE SPECTRUM
VALUE GROWTH
<TABLE>
<CAPTION>
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Boston J.P. Oppen- Total S&P
Partners Morgan heimer Westwood TCW Fund 500 Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Holdings 34 91 27 42 27 177 500
- ---------------------------------------------------------------------------------------------------------------------------
Percent of Holdings in Top 10 40% 28% 60% 36% 58% 19% 22%
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Market
Capitalization (billions) $18 $116 $77 $49 $113 $76 $143
- ---------------------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings
Per Share Growth 15% 17% 15% 21% 30% 20% 17%
- ---------------------------------------------------------------------------------------------------------------------------
Dividend Yield 1.6% 1.2% 1.3% 1.3% 0.2% 1.1% 1.3%
- ---------------------------------------------------------------------------------------------------------------------------
Average Price/Earnings Ratio 17x 23x 21x 27x 41x 25x 31x
- ---------------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 3.1x 4.7x 4.3x 4.7x 9.7x 5.2x 5.4x
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* TCW Investment Management Company replaced Wilke/Thompson Capital Management,
Inc. effective November 1, 1999.
9
<PAGE>
Top 50 Holdings (Unaudited)
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
RANK AS RANK AS MARKET PERCENT OF
OF 12/31/99 OF 9/30/99 SECURITY NAME VALUE ($000) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1 Citigroup, Inc. $46,789 3.4%
2 13 Intel Corp. 31,987 2.3
3 16 Cisco Systems, Inc. 27,467 2.0
4 7 Microsoft Corp. 26,946 1.9
5 10 Nokia Corp. ADR 26,600 1.9
6 5 Sprint Corp. (FON Group) 22,886 1.6
7 176 Dell Computer Corp. 22,165 1.6
8 15 Alcoa, Inc. 21,339 1.5
9 New Siebel Systems, Inc. 20,614 1.5
10 79 Sterling Software, Inc. 19,215 1.4
11 9 SBC Communications, Inc. 19,110 1.4
12 11 AMFM, Inc. 18,772 1.3
13 New Kansas City Southern Industries, Inc. 17,753 1.3
14 2 Monsanto Co. 17,699 1.3
15 6 Computer Associates International, Inc. 17,135 1.2
16 64 Time Warner, Inc. 16,537 1.2
17 New Applied Materials, Inc. 16,267 1.2
18 18 AFLAC, Inc. 15,572 1.1
19 12 Morgan Stanley Dean Witter & Co. 15,460 1.1
20 New Maxim Integrated Products, Inc. 15,336 1.1
21 4 XL Capital Ltd. 14,878 1.1
22 33 Hewlett-Packard Co. 14,618 1.0
23 36 The Home Depot, Inc. 14,532 1.0
24 27 Temple-Inland, Inc. 14,249 1.0
25 19 Federated Department Stores, Inc. 13,647 1.0
26 New Biogen, Inc. 13,114 0.9
27 14 GTE Corp. 12,984 0.9
28 23 Honeywell International, Inc.* 12,876 0.9
29 17 Freddie Mac 12,707 0.9
30 44 Lucent Technologies, Inc. 12,449 0.9
31 28 MCI WorldCom, Inc. 12,273 0.9
32 22 International Business Machines Corp. 12,199 0.9
33 37 Kimberly-Clark Corp. 11,980 0.9
34 129 Burlington Resources, Inc. 11,638 0.8
35 83 Safeway, Inc. 11,540 0.8
36 21 Boeing Co. 11,492 0.8
37 25 Conoco, Inc., Class B 11,413 0.8
38 26 Oracle Corp. 11,335 0.8
39 57 Tiffany & Co. 11,201 0.8
40 147 The Charles Schwab Corp. 11,125 0.8
41 43 AMR Corp. 10,720 0.8
42 32 Halliburton Co. 10,711 0.8
43 104 Procter & Gamble Co. 10,606 0.8
44 New Amgen, Inc. 10,403 0.7
45 63 Electronic Data Systems Corp. 10,389 0.7
46 119 Warner-Lambert Co. 10,308 0.7
47 8 CIGNA Corp. 10,304 0.7
48 56 The Walt Disney Co. 9,793 0.7
49 76 Deere & Co. 9,681 0.7
50 42 Countrywide Credit Industries, Inc. 9,640 0.7
</TABLE>
* Formerly AlliedSignal, Inc.
10
<PAGE>
Major Stock Changes in the Fourth Quarter (Unaudited)
- --------------------------------------------------------------------------------
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 1999, not including changes made in connection with the
substitution of TCW Investment Management Company for Wilke/Thompson Capital
Management, Inc. as a portfolio manager effective November 1, 1999.
- --------------------------------------------------------------------------------
SHARES
------------------------------------------
SECURITY NAME PURCHASED SOLD AS OF 12/31/99
- --------------------------------------------------------------------------------
ACE Ltd. 463,000 463,000
Amgen, Inc. * 173,200 173,200
Biogen, Inc. 155,200 155,200
Burlington Northern Santa Fe Corp. 150,000 200,000
Burlington Resources, Inc. 249,000 352,000
Exxon Mobil Corp. ** 57,290 103,627
Northrop Grumman Corp. 141,400 141,400
Occidental Petroleum Corp. 320,400 320,400
Office Depot, Inc. 380,000 380,000
Sara Lee Corp. 212,500 212,500
Seagate Technology, Inc. 134,200 134,200
Sterling Software, Inc. 284,500 610,000
Textron, Inc. 75,000 75,000
Tribune Co. 98,400 98,400
United Parcel Service, Inc. Class B 101,800 101,800
Wellpoint Health Networks, Inc. 94,000 94,000
Aetna, Inc. (98,600) 0
AT&T Corp. (137,500) 75,700
CIGNA Corp. (87,800) 127,900
Conseco, Inc. (241,100) 118,500
Consolidated Edison, Inc. (244,600) 0
CVS Corp. (178,300) 0
Ford Motor Co. (110,000) 22,300
General Mills, Inc. * (188,200) 0
Monsanto Co. (92,700) 496,800
Morgan Stanley Dean Witter & Co. (69,400) 108,300
The New York Times Co. (143,600) 0
Nokia Corp. ADR (40,000) 140,000
Oracle Corp. (162,200) 101,150
Parker-Hannifin Corp. (164,200) 0
The Pepsi Bottling Group, Inc. (453,200) 0
Tyco International Ltd. * (163,400) 221,268
XL Capital Ltd. (149,600) 286,800
* Adjusted for stock split
** Adjusted for merger of Mobil Corp. and Exxon Corp.
11
<PAGE>
Manager Roundtable
- --------------------------------------------------------------------------------
The Stock Market Climbed a 'Wall of Worry' to Post Another Solid Year in 1999 --
but What of 2000 and Beyond?
A ROBUST ECONOMY, RISING INTEREST RATES, MUCH HIGHER OIL PRICES, EXTENDED
VALUATIONS -- DESPITE WORRIES, THE LEADING MARKET INDICES (BUT JUST A MINORITY
OF THE UNDERLYING STOCKS) REACHED NEW HIGHS IN 1999. IN THIS ROUNDTABLE,
ALL-STAR'S PORTFOLIO MANAGERS ANALYZE WHERE WE'VE BEEN AND TAKE A LOOK AHEAD.
- --------------------------------------------------------------------------------
The views expressed in this interview represent the managers' views at the time
of the discussion (January 2000) and are subject to change.
- --------------------------------------------------------------------------------
What can top 1999? It was the fifth straight year of 20 percent plus returns in
the S&P 500 Index, and the Nasdaq Composite Index roared ahead an astounding
85.6 percent. A handful of stocks rose more than 1,000 percent during the year
(and one, QUALCOMM, was up 2,621 percent). At the same time, the market's
advance was narrow. For example, the average stock in the S&P 500 was up only
half as much as the index. And, 1999 had worries aplenty -- rising interest
rates, higher energy prices, a hawkish Federal Reserve, stretched equity
valuations, and an economic situation that was red hot in the U.S. and improving
abroad. At the same time, there were an ample number of offsetting factors on
the positive side: low inflation, strong corporate earnings, good productivity
gains, rising consumer confidence and a federal budget deficit that transformed
into a surplus.
Now what? How do Liberty All-Star Equity Fund's portfolio managers interpret
the year? What do these experienced investors see ahead? Are things really
"different" this time? And what stocks are they keeping an eye on right now? For
answers, we talk with the Fund's five portfolio managers in this 1999 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 invests 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.
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.
Research focuses on cash flow analysis. Purchase candidates exhibit a high
return on equity, large undedicated cash flow, and reasonable prices in relation
to intrinsic 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-to-earnings ratios than the market.
TCW INVESTMENT MANAGEMENT COMPANY
Portfolio Manager / Glen E. Bickerstaff, Managing Director U.S. Equities
Investment Style / Growth -- TCW invests in companies
12
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
that have superior sales growth, leading and/or rising market shares, and high
and/or rising profit margins. Its concentrated growth equity strategy seeks
leading companies with distinct advantages in their business model and an
inherent edge over their competitors. Research plays a critical role in the
selection process, and the investment horizon is long-term. TCW is the newest of
the Fund's five portfolio management firms, having joined the team in November
1999.
LAMCO: From your perspective, how do you view 1999, particularly the fourth
quarter? What forces drove the market higher -- were they the same factors that
have accounted for its upward move over the past four years, or were there
shifts over this multi-year period? Henry Cavanna, can we ask you to start off?
CAVANNA (J.P. MORGAN -- VALUE): The confluence of a continued strong economy,
abundant liquidity and high investor enthusiasm produced another strong year in
the U.S. stock market. What made the year a bit different was that the market
rose in spite of rising interest rates and was characterized by significant
dispersion in returns between sectors and investment styles. Growth outperformed
value, large cap did better than small cap and technology stocks dominated.
Internet obsession led the large cap tech sector to jump 80 percent. At year-end
the tech sector represented 30 percent of the S&P 500 index. By contrast, six of
the 16 sectors we track actually declined in 1999. Almost half of the stocks in
the S&P 500 finished the year lower. Investors penalized companies with low
valuations, especially if short-term earnings expectations were revised
downward, and rewarded companies with momentum in revenue and/or earnings
growth, regardless of high valuations.
- --------------------------------------------------------------------------------
"Growth outperformed value, large cap did better than small cap and technology
stocks dominated [in 1999] . . . Almost half of the stocks in the S&P 500
finished the year lower."
- --------------------------------------------------------------------------------
LAMCO: Good analysis. Let's hear from a growth manager. Susan Byrne, what are
your thoughts at Westwood?
BYRNE (WESTWOOD -- GROWTH): Westwood's style leads us to growth companies that
are selling at reasonable valuations. Market leadership within the S&P 500
continued to be narrow throughout the year. It was also the year that we saw the
Internet emerge as a viable entity and "dot com" became the theme in the
markets. We still believe that a handful of companies cannot lead the market
higher for an infinite period of time. The top companies are priced for
perfection and those that have had less than perfect execution have seen their
stock prices punished. We continue to find more compelling growth company
valuations in the bottom 450 of the S&P 500.
- --------------------------------------------------------------------------------
"We . . . believe that a handful of companies cannot lead the market higher for
an infinite period of time."
- --------------------------------------------------------------------------------
LAMCO: Thank you. John Lindenthal, what's the view at Oppenheimer?
LINDENTHAL (OPPENHEIMER -- VALUE): Market performance accelerated dramatically
in the last two months of the year. The primary reason was exceptional liquidity
in the financial system. Because of concerns about Y2K issues, the Federal
Reserve allowed the money supply to grow well above the stated bands. The prime
beneficiaries were the same group of stocks that have led the market recently,
i.e.: technology and communications-based companies.
LAMCO: Let's round out the value managers with some comments from you, Mark
Donovan.
DONOVAN (BOSTON PARTNERS -- VALUE): The fourth quarter of 1999 was
representative of a year that feasted on technology and ignored most everything
else. As such, the fourth quarter, and ultimately the year, was not a period of
growth versus value, but technology versus the rest of the market. In order to
keep pace with the broad market over both of these time periods investors had to
be heavily weighted in technology. With the technology sector selling at a lofty
54 times next year's earnings, even some growth investors suffered from
acrophobia. It is interesting to note that the returns of the two large
capitalization Russell style indices
- --------------------------------------------------------------------------------
"With the technology sector selling at a lofty 54 times next year's earnings,
even some growth investors suffered from acrophobia [in 1999]."
- --------------------------------------------------------------------------------
13
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
(growth and value) were about the same this year, exclusive of technology. Add
back technology, and the growth index won by over 25 percentage points.
LAMCO: For a final perspective, let's turn to our other growth manager, TCW.
All-Star shareholders have not yet had the chance to meet Glen Bickerstaff, as
TCW was retained as a manager November 1. We'll profile TCW in our first quarter
report. Meanwhile, Glen, why don't you give us your perspective on 1999.
BICKERSTAFF (TCW -- GROWTH): While the broad market showed substantial returns
in 1999, particularly the fourth quarter, what was most striking about the
performance was the concentration of leadership. We feel, to some extent, the
narrow leadership is warranted. In an economy with low inflation few companies
have pricing power. The Internet is removing the advantages incumbent companies
have. Consumers today see better bargains as trade barriers have been relaxed
and more economies are rapidly exploiting their comparative advantages.
- --------------------------------------------------------------------------------
"We feel, to some extent, the narrow leadership is warranted. In an economy with
low inflation few companies have pricing power. The Internet is removing the
advantages incumbent companies have."
- --------------------------------------------------------------------------------
Over the past four years these factors have become more and more powerful, as
evidenced by market leadership becoming increasingly narrow. In this
environment, companies that have distinct and sustainable product or process
advantages over their competition have delivered consistent growth and have been
rewarded by the stock market.
LAMCO: Interesting observations from everyone. Let's look a little farther back
into "history." Over the decade of the '90s, what sticks in your mind as an
investor? And, related to that, how has the decade changed the behavior and/or
psychology of the individual investor? Glen Bickerstaff and
Susan Byrne, let's hear from the growth managers first and then ask the value
managers the same question.
BICKERSTAFF (TCW -- GROWTH): The decade of the '90s benefited from a number of
trends, notably: A -- Technological advances (including the Internet) and a more
productive demographic base in the developed world; B -- Improved global trade
and a willingness by business to source, produce and distribute product in the
most effective and efficient locations; C -- Central bankers' resolve to control
inflation; D -- Generally, an environment of world peace.
As to the second question, with this backdrop companies in the U.S. were able
to improve their returns on capital and interest rates declined as inflation
fell. Investors, particularly aging baby boomers, who have become more concerned
about their retirement, have embraced the opportunity by buying equity
investments. After witnessing the stock market bounce back from the crash in
1987, many investors view declines with more hope than fear. After several years
of superior returns, surveys show investor expectations are high.
BYRNE (WESTWOOD -- GROWTH): As the new millennium begins, I start my fourth
decade as a professional investor. Some things are the same and others very
different. In the same category, the end of each decade saw one sector
dominating the previous decade's performance while constituting large
percentages of the cap-weighted indices. In the different category, they were
not the same sectors. In the 1970s, oil and commodity-related sectors were the
best performers rising to dominate the S&P 500. Oil was going to $50 per barrel
and it was not unusual for 50 percent of a portfolio to be in the sector. The
end of the 1980s saw consumer and drug stocks, especially multinationals,
dominate. The weak dollar combined with the Asian and South American "economic
miracle" meant these companies could grow at 20 percent plus forever. As we
enter the "2000s," successful portfolios have ridden the Internet wave up to
dizzying heights and technology is now the largest sector. In the same category,
each sector's performance represented the best profit growth of the decade --
and they each underperformed in the following decade.
- --------------------------------------------------------------------------------
". . . the democratization of information, combined with cheap and easy access
to transactions, has brought about what many professional investors think of as
a very risky market due to speculative access by the non-professional
community."
- --------------------------------------------------------------------------------
14
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
As to the individual investor, the Internet has created something that is
very different -- the democratization of information, combined with cheap and
easy access to transactions, has brought about what many professional investors
think of as a very risky market due to speculative access by the
non-professional community. This is the only area where I am seeing the
possibility of permanent change.
LAMCO: How would the value managers view the decade? Mark Donovan, lead off on
this one, please.
Donovan (Boston Partners -- Value): The decade of the 1990s will be remembered
as one of the most successful 10-year periods in stock market history. New
records were set, historical precedence was broken, and the future looks very
bright, if not a little volatile. Many investors think we are in an era when
double digit returns are the norm and triple digit returns are possible on
individual stocks. They believe the "old" rules no longer apply and a long-term
approach toward investing is out of date.
Although the rules may seem to be constantly changing, we would argue that
they are not all obsolete. In fact, the most important rules still do apply.
Investment experience does matter, earnings and cash flow are important to a
company's long-term viability, and a long-term approach is essential to
consistent returns. Regardless of individual investors' current psychology,
which argues that equity markets only go up, we are firm believers that it is
not going to be different this time.
- --------------------------------------------------------------------------------
"Regardless of individual investors' current psychology, which argues that
equity markets only go up, we are firm believers that it is not going to be
different this time."
- --------------------------------------------------------------------------------
LAMCO: John Lindenthal, your thoughts?
LINDENTHAL (OPPENHEIMER -- VALUE): For most of the '90s, we have had sound
policies from the Federal Reserve Board and, therefore, low inflation. During
sustained periods of low inflation, financial assets, mainly equities, usually
do well. Another important ingredient of the 1990s bull market was a powerful
increase in returns on invested capital. This supported a solid growth in
earnings for U.S. based corporations. Also, advancements in technology have
improved the individual investor's ability to trade on his or her own. With much
more information available through the Internet, individuals are able to make
better choices among alternative investments.
LAMCO: Henry Cavanna, share your thoughts, please.
CAVANNA (J.P. MORGAN -- VALUE): What sticks out to me is the length and strength
of the economic cycle in the U.S. coming off the 1990-91 recession, and the
tremendous wealth that has been created over a 10-year period of double digit
compounding for major market indices -- 18.2 percent for the S&P 500. All of
this was accomplished with low and declining inflation and consistent
improvements in productivity. In the 90s, we witnessed an explosion in
technology applications extending to the mainstream of America, a trend that is
likely to continue well into the next decade. In social terms, we have begun to
witness the impact of the peace dividend that was expected as a result of the
end of the cold war. History books will use words like "prosperity" and
"technology" to mark this decade.
- --------------------------------------------------------------------------------
"What sticks out to me is the length and strength of the economic cycle in the
U.S. coming off the 1990-91 recession, and the tremendous wealth that has been
created over a 10-year period of double digit compounding . . ."
- --------------------------------------------------------------------------------
As to individual investors, good returns finally brought them back into the
market with a vengeance, initially through equity mutual funds and more recently
through online trading, a new benefit of technology and the Internet. Day
trading by retail investors is an end-of-decade phenomenon that captures the
worrisome trends of the current euphoria. Momentum and short-term thinking
without a commensurate dose of analysis and valuation parameters ultimately lead
to corrections as multiples become detached from fundamental reality.
LAMCO: Having taken a look back, let's peek into the near-term future. Coming
into 2000, do you anticipate "more of the same" from the domestic equity market
or should investors expect a change in the environment? We heard from the growth
managers first on the last question, so let's ask Mark Donovan to lead off for
the value managers.
15
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
DONOVAN (BOSTON PARTNERS -- VALUE): As we enter 2000, we expect that many of the
current trends will remain in place with, however, some deviation back to
historical norms. The current catalyst in the market's strength is growth in the
technology sector, particularly the Internet phenomenon. The boom in the
development of the Internet and the simultaneous explosion in demand for
broadband communications has fueled a rise in valuations of anything connected
to the "New Economy." This includes "dot com" companies, Internet infrastructure
companies, telecommunications equipment companies and hardware suppliers.
Advocates of these stocks maintain that valuations are essentially irrelevant
because the growth in these businesses is unlike anything we have ever seen and
is virtually unstoppable. If this is true, then the old rules of valuation do
not apply. Yahoo's price-to-earnings ratio of 482 or its price-to-sales ratio of
139 are meaningless when considering the enormous growth that Yahoo will
experience in the future, according to the stock's supporters. We believe that a
few of the Internet companies will be successful, but like the railroads,
automobiles and the airlines, the introduction of life-changing technology does
not always result in an unlimited supply of companies that will provide
stratospheric investment returns. The recent behavior of these stocks --
particularly after the America Online/Time Warner announcement -- leads us to
believe that investors are beginning to come to the same conclusion.
- --------------------------------------------------------------------------------
"An important ingredient of the 1990s bull market was a powerful increase in
returns on invested capital. This supported a solid growth in earnings for U.S.
based corporations."
- --------------------------------------------------------------------------------
LAMCO: Henry Cavanna and John Lindenthal, what are your views on 2000?
CAVANNA (J.P. MORGAN -- VALUE): Coming into 2000, we expect a broadening of the
market to include industrial and financial companies. While technology and
Internet stocks should give back some gains due to their sky-high valuations, we
expect the momentum in technology spending to continue, being driven by growth
in the Internet, e-commerce, and wireless and data communications trends. What
will be different will be caused by a background of more synchronized growth
around the world -- better in Europe, recovery in Asia and Latin America, and
more moderate growth in the U.S. Smaller cap stocks should also do better as
investors appear finally to be recognizing many of the opportunities and values
in this market sector. One worrisome factor will be the prospect of tighter
monetary policy, which should hold back some of the upside potential for U.S.
stocks.
LINDENTHAL (OPPENHEIMER -- VALUE): We expect the market to broaden over the
course of 2000. It has shown some signs of doing this over the past year, but so
far none of these moves has been sustained. The leadership in the market has
been extremely narrow, and a broadening would be healthy for the long run.
LAMCO: Now, let's hear from the growth managers on this point. Susan Byrne,
share your thoughts, please.
BYRNE (WESTWOOD -- GROWTH): Coming into 2000, we think investors should look for
little change in the markets. Our outlook suggests that the "market" is
overvalued at this level. However, the broad market has reached these levels as
a result of a relatively small number of companies. While Internet companies
contributed to the market's excitement in 1999, growth can be found in other
market sectors. When we look at the companies that have not led the market up,
we find that they are undervalued at today's levels. Many of the companies that
are not perceived as benefiting from the Internet have shown excellent top and
bottom line growth, but have not yet been rewarded for that performance in the
marketplace. As investors search for good growth companies in this market, we
think companies in these undervalued sectors will be rewarded.
BICKERSTAFF (TCW -- GROWTH): We believe that most of the factors witnessed in
the '90s are still in place. The utilization of broad bandwidth should enable
even greater technology-driven improvements in productivity. These factors will
continue
- --------------------------------------------------------------------------------
"We believe that most of the factors witnessed in the '90s are still in place. .
. . These factors will continue to shape competition and enable companies with
superior business models to capture superior returns."
- --------------------------------------------------------------------------------
16
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
to shape competition and enable companies with superior business models
to capture superior returns.
LAMCO: Speak to your own style -- growth or value -- going into the new
millennium. In other words, has the definition of growth or value changed over
the years, or remained pretty much the same? What do you believe the future
holds for your style? Glen Bickerstaff, continue, please.
BICKERSTAFF (TCW -- GROWTH): Our approach centers on identifying leading
companies with distinct and sustainable product or process advantage that
benefit from long-term secular trends. Today's economic environment favors these
companies.
LAMCO: Susan Byrne, your view?
BYRNE (WESTWOOD -- GROWTH): Common valuation metrics have included book value,
earnings per share, cash flow, etcetera. Multiples were then attached, a range
was applied, and individual securities were deemed to be cheap or dear depending
on where they fell on the scale. The nature of an industrial company is to have
assets in plants and equipment that produces goods. This increases book value
while operating leverage influences cash flow. In our service-based economy,
less than one-third of GDP is associated with manufacturing and the twenty-first
century will probably diminish that further. Why then would book value continue
to be used if it forces the growth at a reasonable price manager into
nongrowing, declining industries? Using an adjusted price-to-sales valuation may
be a much better approach. This has allowed us to identify future growth
leaders.
- --------------------------------------------------------------------------------
"It is important for all investors to find a way to participate in technology
and the Internet because of the overwhelming impact these trends are having on
all of our lives."
- --------------------------------------------------------------------------------
LAMCO: John Lindenthal, lead off for the value managers, please, and then let's
hear from Henry Cavanna and Mark Donovan.
LINDENTHAL (OPPENHEIMER -- VALUE): Value investing has been out of favor for
about two years. Growth investing has obviously been in favor over the past two
years. Historically, that is about as long as one style dominates. We are never
sure of what the catalyst is to change things more in our favor, but we do know
that we have to be ready. Well positioned companies create value over long
periods of time, and eventually the market recognizes the build-up in value.
CAVANNA (J.P. MORGAN -- VALUE): Our style is to invest on a balanced basis in
all major market sectors, along with applying a value discipline within sectors.
Having a value discipline has been counterproductive in a market that focuses
primarily on momentum. Definitions of value and growth are often debated, but
what is clear is that pure value investing without a short-term catalyst, like
positive earnings revisions, will continue to be problematic. It is important
for all investors to find a way to participate in technology and the Internet
because of the overwhelming impact these trends are having on all of our lives.
- --------------------------------------------------------------------------------
"Value investing has been out of favor for about two years . . . We are never
sure of what the catalyst is to change things more in our favor, but we do know
that we have to be ready."
- --------------------------------------------------------------------------------
DONOVAN (BOSTON PARTNERS -- VALUE): We believe that the future for value
investing is very bright. The fact that such a broad segment of the public has
dismissed the value strategy as being obsolete gives us greater confidence that
we are at or near an inflection point in the market. Although we do not believe
that the basic premises behind value and growth investing have changed, we would
agree that the rules behind these two distinct styles are constantly being
challenged. In every bull market that has been led by one sector -- technology
in mid '60s, oil in late '70s, biotech in mid-'80s -- investors have touted how
"it's different this time." Yes, the investment climate is different and the
world is in a different state both politically and economically, but to argue
that the laws of finance have been repealed based on a cyclical move in the
market could prove to be short-sighted and dangerous. It is highly unlikely that
the momentum-driven market of 1999 will repeat itself in 2000, given the enor-
17
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
mous valuation gap that now exists between the perceived "hyper-growth" stocks
and everything else. A portfolio of sensibly priced stocks with strong
fundamentals seems to be a very prudent strategy in this risky environment.
LAMCO: Let's focus on a related question: What's the future of diversification
when concentrated, cap-weighted indices such as the Nasdaq and the S&P 500 rack
up big gains and the stock market separates into tech stocks and "all other?"
Mark Donovan, let's stay with you.
DONOVAN (BOSTON PARTNERS -- VALUE): Given the current concentration of the
Nasdaq and the S&P 500, we feel that now is a very important time for
diversification. With so few stocks leading the market -- remember, breadth was
negative in 1999! -- exposure to the "forgotten stocks" will most likely
insulate an investor to a correction of the market leaders. Remember, too, with
the average stock in the NYSE and the S&P in negative territory for the year
1999, there has already been a correction in the average stock.
LAMCO: Henry Cavanna, what is J.P. Morgan's thinking?
CAVANNA (J.P. MORGAN -- VALUE): We feel comfortable taking a diversified
approach, investing both in the new economy and the old economy with a tilt
toward those industries and companies with more reasonable valuations, and being
more sensitive to fundamental catalysts that will change investor perceptions.
LAMCO: What does Oppenheimer believe?
LINDENTHAL (OPPENHEIMER -- VALUE): The large capitalization tech stocks that
dominate the S&P 500 and Nasdaq are selling at price-to-earnings multiples -- if
there are any earnings at all -- that have never been seen before. The spread
between high multiple and low multiple stocks is wider than it has ever been.
The lower multiple stocks are very attractive and will catch up over time.
LAMCO: How about the growth managers?
BICKERSTAFF (TCW -- GROWTH): In the 1950s, Nobel prize winner Harry Markowitz
determined that full diversification is achieved with a remarkably few
securities held in varied sectors. This still holds true. Moreover, in a very
open and dynamic economy, competition allows for innovative newcomers to unseat
incumbent companies at a rapid rate.
BYRNE (WESTWOOD -- GROWTH): Diversification has taken on new meaning now that
the market has racked up huge gains with the help of tech stocks. Both the
Nasdaq and the S&P 500 are capitalization-weighted indices and are now more
appropriate as benchmarks for true growth investors. Increasingly, we think,
they will be tossed out in favor of equal-weighted benchmarks. Look for
investors to follow equal-weighted benchmarks as a truer reference for what the
"market" is doing.
- --------------------------------------------------------------------------------
"Diversification has taken on new meaning . . . Both the Nasdaq and the S&P 500
are capitalization-weighted indices and are now more appropriate as benchmarks
for true growth investors. Increasingly, we think, they will be tossed out in
favor of equal-weighted benchmarks."
- --------------------------------------------------------------------------------
LAMCO: What are you keying on for 2000 in terms of factors such as interest
rates, inflation, economic growth, corporate earnings and the election?
Thoughts, Susan Byrne?
BYRNE (WESTWOOD -- GROWTH): Looking into 2000, I see a "steady as she goes"
world. The consumer should continue to stay strong, with only a slight
moderation in spending. Manufacturing will continue to rebound as global demand
for exports increases. We could also see the Fed increase interest rates another
50 basis points. Inflation may tick up slightly to 3 percent, but should not be
a long-term problem, and any first half Fed action should help rates later in
the year.
LAMCO: Glen Bickerstaff, comment for TCW, please.
BICKERSTAFF (TCW -- GROWTH): We anticipate that the full effect of the Federal
Reserve interest rate increases and higher energy costs will soon impact the
broad economy. At the same time, consumer confidence is very high. The combined
effect may result in an economic slowdown for certain companies and an
opportunity to gain market share
18
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
for other companies. Businesses that can deliver consistent growth in the year
2000 will be very valuable. We expect that demand for technology-based
productivity solutions, financial services, breakthrough health care products
and interesting entertainment content will continue to be strong. In addition,
companies that, through process advantage and economies of scale, can offer
better value for consumers will thrive.
- --------------------------------------------------------------------------------
"We expect that demand for technology-based productivity solutions, financial
services, breakthrough health care products and interesting entertainment
content will continue to be strong."
- --------------------------------------------------------------------------------
LAMCO: How do you see it, Mark Donovan?
DONOVAN (BOSTON PARTNERS -- VALUE): As a bottom-up manager, we are concentrating
primarily on earnings at the individual company level. We focus on valuations
and business strength -- i.e., a company's position in its industry --but the
consistency of earnings over time is a factor that we believe will immediately
influence a company's stock price. We take an interest in the macro factors
shaping the market, but do not model in any predictions. As an observation,
however, we would point out that the companies in economically sensitive sectors
- -- principally capital goods, basic industries and energy -- are seeing
continued strengthening of demand for their end products on a global basis. This
lends further credence, in our view, to a continued synchronous expansion around
most of the world. This would suggest that we have not yet seen the highs for
interest rates either domestically or abroad.
LAMCO: Henry Cavanna, what's the view at J. P. Morgan?
CAVANNA (J.P. MORGAN -- VALUE): We are expecting the U.S. economy to do well in
2000, growing more moderately at closer to 3 percent real GDP, with higher
interest rates slowing the growth in domestic consumption. While headline
inflation will be higher in the early part of the year due to higher energy
prices, we expect core inflation to stay benign, similar to 1999 at around 2.5
percent. Corporate earnings will do nicely, increasing about 14 percent, helped
especially by strong earnings from the foreign operations of U.S. companies. The
election will not derail investor confidence since whoever wins will have to
promise tax cuts and the maintenance of current prosperity.
LAMCO: John Lindenthal, share Oppenheimer's thinking, please.
LINDENTHAL (OPPENHEIMER -- VALUE): The only macro factor we focus on is
financial liquidity. The Federal Reserve will not allow money to grow at close
to double digit rates for much longer. Therefore, we could get somewhat of a
squeeze between the demand for funds and how much the Fed is willing to supply.
Historically, high price-to-earnings stocks like those that have led the Nasdaq,
have not fared well in this type of environment.
- --------------------------------------------------------------------------------
" . . . we would point out that the companies in economically sensitive sectors
- -- principally capital goods, basic industries and energy -- are seeing
continued strengthening of demand for their end products on a global basis."
- --------------------------------------------------------------------------------
LAMCO: This has been a very interesting discussion, highlighted by some very
thoughtful comments, and we'd like to thank all of you for sharing your
insights. Current stocks in the portfolio are always of interest, so let's close
by asking each of you to highlight two stocks you currently own. Let's start
with the value managers. Henry Cavanna, would you begin?
CAVANNA (J.P. MORGAN -- VALUE): Ambac is an insurance company that provides
financial guarantees to issuers of municipal bonds and asset backed securities.
It has good management, a strong balance sheet, sustainable growth of 13 percent
and is priced at 10 times 2000 earnings. Seagram is a much improved
entertainment company with an excellent collection of assets that include the
world's largest music company, 46 percent ownership in USA Networks, successful
theme parks, a major film company, and a mature but profitable spirits business.
It sells at 11 times EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization), which is low for an entertainment company with good growth
prospects. The continued improvement of the music business helped by solving
Internet technology issues should improve investor expectations in the coming
year.
19
<PAGE>
Manager Roundtable -- continued
- --------------------------------------------------------------------------------
DONOVAN (BOSTON PARTNERS -- VALUE): The recent acquisition of Time Warner by
America Online has everybody talking about the need for "content" among Internet
companies. We believe that this demand for content will ultimately benefit the
shares of Harcourt General and Tribune. Harcourt is among the nation's leading
educational publishers. The company has spent heavily in the last several years
to build a market-leading ability to deliver its educational content
electronically, in addition to the traditional bound textbook. We believe these
investments will significantly enhance Harcourt's competitive edge in the years
ahead. Tribune is also well positioned in the educational publishing industry,
but its assets are much more heavily skewed to newspaper publishing and
television broadcasting. Tribune is seeing strong momentum across these
segments. Despite strong recent performance, we believe Tribune's share price
does not fully reflect the value of its underlying assets.
- --------------------------------------------------------------------------------
"The only macro factor we focus on is financial liquidity. The Federal Reserve
will not allow money to grow at close to double digit rates for much longer.
Therefore, we could get somewhat of a squeeze . . ."
- --------------------------------------------------------------------------------
LINDENTHAL (OPPENHEIMER -- VALUE): One of our longstanding positions that has
been penalized by higher interest rates over the past year is Freddie Mac.
Freddie generates income by insuring loans that are securitized and sold to
financial institutions, and it also maintains a sizable investment portfolio.
Freddie consistently generates a high return on capital and uses its free cash
flow to benefit the shareholder by buying in their own stock or building the
investment portfolio. Freddie is an extremely high quality business selling at a
very reasonable price. In the capital goods sector, Textron produces automotive,
industrial and aerospace equipment. The Cessna aircraft division is benefiting
from strong orders for business jets. Textron has consolidated many operations
in the past few years (it recently sold Avco Financial) and has been
aggressively buying its own stock. Market shares in all divisions are very high
and the stock is attractively priced.
LAMCO: Wrap it up from the growth investor's perspective please, Susan Byrne and
Glen Bickerstaff.
BYRNE (WESTWOOD -- GROWTH): The combination of America Online (AOL) and Time
Warner (TWX) creates a media juggernaut for the Internet century. This deal
creates a company with stronger growth opportunities thanks to cross-marketing
possibilities and complementary assets. TWX brings a vast cable broadband
infrastructure that passes 20 million homes and an extensive content library to
enhance AOL's product offerings. AOL brings its customer base, Web portal
traffic and proven Internet technology to help leverage the value of TWX's
assets. Tiffany & Co. is benefiting from positive trends in domestic and
international arenas and company-specific initiatives should help it to continue
posting strong sales gains. The company is benefiting internally from
improvements in infrastructure and its investments in internal manufacturing and
sourcing should help sustain above average earnings growth.
BICKERSTAFF (TCW -- GROWTH): The two companies we would like to highlight are
Biogen and Dell Computer. Biogen develops, manufactures and markets biomedical
compounds. The company derives strong current and future revenues from its
Avonex product used in the treatment of relapsing forms of multiple sclerosis.
In addition, the company is developing promising follow-on products and
expanding the sales of Avonex internationally.
In 1999, Dell Computer became the domestic market share leader in the rapidly
growing personal computer manufacturing and sales industry. Dell, by virtue of
its direct model, has distinct and sustainable advantages over competitors who
primarily rely on the retail distribution channel. As Dell has developed its
Internet business with the business customer, it has made both its operation
more efficient and improved its relationship with the customer. This improved
customer relationship will prove to be a significant advantage as the company
moves to expand sales of higher margin server-related products. Dell is also
building its presence in overseas markets, which should further fuel its growth.
LAMCO: Many thanks to all of you.
20
<PAGE>
Schedule of Investments as of December 31, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS (97.7%) SHARES MARKET VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.3%)
Boeing Co. 276,500 $11,492,031
Northrop Grumman Corp. 141,400 7,644,438
-----------
19,136,469
-----------
AUTOS, TIRES & ACCESSORIES (0.6%)
Delphi Automotive Systems Corp. 221,100 3,482,325
Ford Motor Co. 22,300 1,191,656
Lear Corp. (a) 99,100 3,171,200
-----------
7,845,181
-----------
BANKS (6.3%)
ABN AMRO Holdings NV ADR 184,359 4,666,587
Astoria Financial Corp. 27,500 837,031
Bank of America Corp. 81,334 4,081,950
Citigroup, Inc. 842,100 46,789,181
First Union Corp. 131,000 4,298,438
FleetBoston Financial Corp. 218,400 7,603,050
Greenpoint Financial Corp. 44,400 1,057,275
PNC Bank Corp. 174,700 7,774,150
Washington Mutual, Inc. 103,400 2,688,400
Wells Fargo & Co. 200,000 8,087,500
-----------
87,883,562
-----------
BROADCASTING & CABLE (2.4%)
AMFM, Inc. (a) 239,900 18,772,175
AT&T Corp-Liberty Media Group Class A 77,600 4,403,800
Cox Communications, Inc. Class A (a) 146,600 7,549,900
The News Corp., Ltd. ADR 83,700 3,201,525
-----------
33,927,400
-----------
BUSINESS & CONSUMER SERVICES (0.5%)
America Online, Inc. (a) 53,500 4,035,906
Cendant Corp. (a) 121,000 3,214,062
-----------
7,249,968
-----------
CHEMICALS (1.7%)
Monsanto Co. 496,800 17,698,500
Rohm & Haas Co. 147,000 5,981,063
-----------
23,679,563
-----------
See Notes to Schedule of Investments.
21
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (4.9%)
Cisco Systems, Inc. (a) 256,400 $ 27,466,850
Cobalt Networks, Inc. (a) 21,200 2,297,550
Lucent Technologies, Inc. 166,400 12,448,800
Nokia Corp. ADR 140,000 26,600,000
------------
68,813,200
------------
COMPUTER & BUSINESS EQUIPMENT (5.7%)
Apple Computer, Inc. (a) 14,300 1,470,219
Compaq Computer Corp. 146,500 3,964,656
Dell Computer Corp. (a) 434,600 22,164,600
EMC Corp. (a) 34,100 3,725,425
Hewlett-Packard Co. 128,300 14,618,181
International Business Machines Corp. 112,950 12,198,600
Seagate Technology, Inc. (a) 134,200 6,248,688
Sun Microsystems, Inc. (a) 108,500 8,401,969
3Com Corp. (a) 145,200 6,824,400
------------
79,616,738
------------
COMPUTER SERVICES & SOFTWARE (8.0%)
Citrix Systems, Inc. (a) 7,800 959,400
Computer Associates International, Inc. 245,000 17,134,688
Electronic Data Systems Corp. 155,200 10,388,700
Intuit, Inc. (a) 79,400 4,759,038
Microsoft Corp. (a) 230,800 26,945,900
Oracle Corp. (a) 101,150 11,335,122
Siebel Systems, Inc. (a) 245,400 20,613,600
Sterling Software, Inc. (a) 610,000 19,215,000
------------
111,351,448
------------
CONSUMER PRODUCTS (2.7%)
Avon Products, Inc. 250,000 8,250,000
Clorox Co. 24,900 1,254,338
Gillette Co. 44,700 1,841,081
Kimberly-Clark Corp. 183,600 11,979,900
Philip Morris Companies, Inc. 148,400 3,441,025
Procter & Gamble Co. 96,800 10,605,650
------------
37,371,994
------------
See Notes to Schedule of Investments.
22
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
DIVERSIFIED (3.6%)
Cooper Industries, Inc. 19,600 $ 792,575
General Electric Co. 21,100 3,265,225
Honeywell International, Inc. 223,200 12,875,850
Loews Corp. 133,500 8,101,781
Minnesota Mining & Manufacturing Co. 70,000 6,851,250
The Seagram Co., Ltd. 87,400 3,927,538
Textron, Inc. 75,000 5,751,562
Tyco International Ltd. 221,268 8,601,794
-----------
50,167,575
-----------
DRUGS & HEALTH CARE (6.6%)
ALZA Corp. (a) 115,900 4,013,038
American Home Products Corp. 57,600 2,271,600
Amgen, Inc. (a) 173,200 10,402,825
Biogen, Inc. (a) 155,200 13,114,400
Bristol-Myers Squibb Co. 76,200 4,891,088
Eli Lilly & Co. 26,800 1,782,200
Forest Laboratories, Inc. (a) 79,900 4,908,856
Medtronic, Inc. 134,300 4,893,556
PE Corp-PE Biosystems Group 20,300 2,442,344
Pfizer, Inc. 276,900 8,981,944
Pharmacia & Upjohn, Inc. 148,100 6,664,500
SmithKline Beecham PLC ADR 121,900 7,854,931
Tenet Healthcare Corp. (a) 120,100 2,822,350
Warner-Lambert Co. 125,800 10,307,738
Wellpoint Health Networks, Inc. (a) 94,000 6,198,125
-----------
91,549,495
-----------
ELECTRIC & GAS UTILITIES (2.3%)
Allegheny Energy, Inc. 32,600 878,163
Columbia Energy Group 92,800 5,869,600
Florida Progress Corp. 174,900 7,400,456
Northern States Power Co. 68,800 1,341,600
Peco Energy Co. 261,800 9,097,550
P G & E Corp. 56,800 1,164,400
Reliant Energy, Inc. 289,300 6,617,738
-----------
32,369,507
-----------
See Notes to Schedule of Investments.
23
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
ELECTRONICS & ELECTRICAL EQUIPMENT (5.7%)
Applied Materials, Inc. (a) 128,400 $16,266,675
Emerson Electric Co. 100,000 5,737,500
Intel Corp. 388,600 31,986,638
International Game Technology (a) 122,200 2,482,188
Maxim Integrated Products, Inc. (a) 325,000 15,335,938
Motorola, Inc. 29,900 4,402,775
Sensormatic Electronics Corp. (a) 36,100 629,494
Texas Instruments, Inc. 25,400 2,460,625
-----------
79,301,833
-----------
FINANCIAL SERVICES (6.2%)
The Charles Schwab Corp. 289,900 11,124,912
The CIT Group, Inc. 120,200 2,539,225
Countrywide Credit Industries, Inc. 381,800 9,640,450
Fannie Mae 151,300 9,446,794
Freddie Mac 270,000 12,706,875
The Goldman Sachs Group, Inc. 33,200 3,127,025
Morgan Stanley Dean Witter & Co. 108,300 15,459,825
Paychex, Inc. 229,575 9,183,000
Providian Financial Corp. 94,500 8,605,406
U.S. Bancorp 150,700 3,588,544
-----------
85,422,056
-----------
FOOD, BEVERAGE & RESTAURANTS (2.7%)
Anheuser-Busch Companies, Inc. 118,000 8,363,250
Bestfoods 26,400 1,387,650
The Coca-Cola Co. 13,000 757,250
Diageo PLC ADR 160,000 5,120,000
International Home Foods, Inc. (a) 223,100 3,876,363
McDonald's Corp. 120,000 4,837,500
Nabisco Holdings Corp. 217,500 6,878,438
PepsiCo, Inc. 65,300 2,301,825
Sara Lee Corp. 212,500 4,688,281
-----------
38,210,557
-----------
See Notes to Schedule of Investments.
24
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
HOTELS & ENTERTAINMENT/LEISURE (2.7%)
Mirage Resorts, Inc. (a) 175,800 $ 2,691,937
Pixar, Inc. (a) 122,100 4,319,288
Starwood Hotels & Resorts Worldwide, Inc. 176,100 4,138,350
Time Warner, Inc. 228,300 16,537,481
The Walt Disney Co. 334,800 9,792,900
-----------
37,479,956
-----------
INDUSTRIAL EQUIPMENT (1.9%)
Caterpillar, Inc. 130,000 6,118,125
Deere & Co. 223,200 9,681,300
Dover Corp. 110,000 4,991,250
Ingersoll-Rand Co. 126,400 6,959,900
-----------
27,750,575
-----------
INSURANCE (5.9%)
ACE Ltd. 463,000 7,726,313
AFLAC, Inc. 330,000 15,571,875
Allmerica Financial Corp. 121,700 6,769,562
Ambac Financial Group, Inc. 70,300 3,668,781
American International Group, Inc. 58,400 6,314,500
CIGNA Corp. 127,900 10,303,944
Conseco, Inc. 118,500 2,118,188
Marsh & McLennan Companies, Inc. 62,100 5,942,193
The Progressive Corp. 130,100 9,513,563
XL Capital Ltd. 286,800 14,877,750
-----------
82,806,669
-----------
METALS & MINING (1.6%)
Alcoa, Inc. 257,100 21,339,300
Allegheny Teledyne, Inc. 68,500 1,536,968
Reynolds Metals Co. 1,500 114,937
-----------
22,991,205
-----------
OIL & GAS (6.6%)
Apache Corp. 226,400 8,362,650
Burlington Resources, Inc. 352,000 11,638,000
Conoco, Inc. Class A 367,600 9,098,100
Conoco, Inc. Class B 458,800 11,412,650
See Notes to Schedule of Investments.
25
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
OIL & GAS (CONT.)
Cooper Cameron Corp. (a) 48,300 $ 2,363,681
Devon Energy Corp. 130,779 4,299,360
El Paso Energy Corp. 155,200 6,023,700
Exxon Mobil Corp. 103,627 8,348,450
Halliburton Co. 266,100 10,710,525
Occidental Petroleum Corp. 320,400 6,928,650
Royal Dutch Petroleum Co. 35,862 2,167,409
Texaco, Inc. 146,400 7,951,350
Tosco Corp. 115,400 3,137,437
-----------
92,441,962
-----------
PAPER (1.1%)
Smurfit-Stone Container Corp. (a) 49,700 1,217,650
Temple-Inland, Inc. 216,100 14,249,093
-----------
15,466,743
-----------
PUBLISHING (0.8%)
R. R. Donnelley & Sons Co. 220,000 5,458,750
Tribune Co. 98,400 5,418,150
-----------
10,876,900
-----------
REAL ESTATE INVESTMENT TRUSTS (0.3%)
Kimco Realty Corp. 59,900 2,029,112
Vornado Realty Trust 71,700 2,330,250
-----------
4,359,362
-----------
RETAIL TRADE (6.9%)
Abercrombie & Fitch Co. (a) 57,900 1,545,206
AnnTaylor Stores Corp. (a) 102,600 3,533,288
Circuit City Stores, Inc. 151,600 6,831,475
Dayton Hudson Corp. 30,100 2,210,468
Federated Department Stores, Inc. (a) 269,900 13,646,819
Harcourt General, Inc. 156,500 6,299,125
The Home Depot, Inc. 211,950 14,531,821
The Limited, Inc. 206,700 8,952,694
May Department Stores Co. 225,000 7,256,250
Office Depot, Inc. (a) 380,000 4,156,250
Safeway, Inc. (a) 324,500 11,540,031
See Notes to Schedule of Investments.
26
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
- --------------------------------------------------------------------------------
RETAIL TRADE (CONT.)
Tiffany & Co. 125,500 $ 11,200,875
The TJX Companies, Inc. 52,400 1,070,925
Wal-Mart Stores, Inc. 57,900 4,002,337
--------------
96,777,564
--------------
TELECOMMUNICATIONS (5.5%)
AT&T Corp. 75,700 3,841,775
Bell Atlantic Corp. 29,600 1,822,250
Global Crossing Ltd. (a) 35,500 1,775,000
GTE Corp. 184,000 12,983,500
Level 3 Communications, Inc. (a) 9,500 777,812
MCI WorldCom, Inc. (a) 231,300 12,273,356
SBC Communications, Inc. 392,000 19,110,000
Sprint Corp. (FON Group) 340,000 22,886,250
Sprint Corp. (PCS Group) (a) 8,300 850,750
--------------
76,320,693
--------------
TRANSPORTATION (3.2%)
AMR Corp. (a) 160,000 10,720,000
Burlington Northern Santa Fe Corp. 200,000 4,850,000
Kansas City Southern Industries, Inc. 237,900 17,753,288
Union Pacific Corp. 85,400 3,725,575
United Parcel Service, Inc. Class B 101,800 7,024,200
--------------
44,073,063
--------------
TOTAL COMMON STOCKS (COST $991,716,312) 1,365,241,238
--------------
PREFERRED STOCK (0.4%)
BROADCASTING & CABLE (0.4%)
The News Corp., Ltd. ADR (Cost $4,611,740) 150,000 5,015,625
--------------
See Notes to Schedule of Investments.
27
<PAGE>
Schedule of Investments -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
INTEREST MATURITY PAR MARKET
SHORT-TERM INVESTMENTS (2.8%) RATE DATE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (1.0%)
Baltimore Gas & Electric 6.450% 01/11/00 $ 2,900,000 $ 2,894,803
Ford Motor Credit Corp 5.960 01/03/00 3,600,000 3,598,808
Household Finance 5.300 01/04/00 2,700,000 2,698,808
Household Finance 5.300 01/06/00 2,500,000 2,498,160
Household Finance 6.350 01/13/00 2,800,000 2,794,073
---------------
TOTAL COMMERCIAL PAPER (COST $14,484,652) 14,484,652
---------------
REPURCHASE AGREEMENT (1.8%)
SBC Warburg Ltd., Repurchase Agreement dated 12/31/99,
2.50% to be repurchased at $24,494,102 on 01/03/00,
collateralized by U.S. Treasury bonds and notes with
various maturities to 2021, with a current market
value of $24,995,196 24,489,000 24,489,000
---------------
TOTAL SHORT-TERM INVESTMENTS (COST $38,973,652) 38,973,652
---------------
TOTAL INVESTMENTS (100.9%) (COST $1,035,301,704) (b) 1,409,230,515
OTHER ASSETS AND LIABILITIES, NET (-0.9%) (13,029,536)
---------------
NET ASSETS (100.0%) $ 1,396,200,979
===============
NET ASSET VALUE PER SHARE (99,577,653 SHARES OUTSTANDING) $14.02
===============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Cost of investments for federal income tax purposes is $1,041,086,770.
Gross unrealized appreciation and depreciation of investments at
December 31, 1999 is as follows:
Gross unrealized appreciation $418,106,379
Gross unrealized depreciation (49,962,634)
------------
Net unrealized appreciation $368,143,745
============
Acronym Name
- --------- ---------------------------
ADR American Depositary Receipt
See Notes to Financial Statements.
28
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments at market value (identified cost $1,035,301,704) $1,409,230,515
Receivable for investments sold 939,442
Dividends and interest receivable 1,494,707
Other assets 66,411
Cash 1,827
--------------
TOTAL ASSETS 1,411,732,902
--------------
LIABILITIES:
Payable for investments purchased 265,887
Distributions payable to shareholders 14,845,421
Administrative and bookkeeping fees payable 9,368
Accrued expenses 158,058
Other liabilities 253,189
--------------
TOTAL LIABILITIES 15,531,923
--------------
NET ASSETS $1,396,200,979
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of
beneficial interest without par value authorized,
99,577,653 shares outstanding) $ 961,570,276
Undistributed net investment income 583,958
Accumulated net realized gains on investments
less distributions 60,117,934
Net unrealized appreciation on investments 373,928,811
--------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($14.02 PER SHARE) $1,396,200,979
==============
See Notes to Financial Statements.
29
<PAGE>
Financial Statements -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 16,447,842
Interest 1,624,090
---------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $159,127) 18,071,932
EXPENSES:
Management fees $ 9,510,973
Administrative fee 2,371,891
Bookkeeping fee 284,662
Custodian and transfer agent fees 138,067
Proxy and shareholder communication expense 189,582
Printing expense 197,621
Legal and audit fees 70,763
Trustees' fees and expense 87,091
NYSE fees 90,214
Miscellaneous expense 114,056
---------------
TOTAL EXPENSES 13,054,920
---------------
NET INVESTMENT INCOME 5,017,012
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investment transactions:
Proceeds from sales 1,261,611,854
Cost of investments sold 1,104,361,679
---------------
Net realized gains on investment transactions 157,250,175
Net unrealized appreciation on investments:
Beginning of year 412,894,932
End of year 373,928,811
---------------
Change in unrealized appreciation--net (38,966,121)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 123,301,066
===============
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
Financial Statements -- continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
STATEMENT OF CHANGES IN NET ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,017,012 $ 4,884,011
Net realized gains on investment transactions 157,250,175 108,774,108
Change in unrealized appreciation--net (38,966,121) 105,186,947
--------------- ---------------
Net increase in net assets resulting from operations 123,301,066 218,845,066
--------------- ---------------
DISTRIBUTIONS DECLARED FROM:
Net investment income (4,396,010) (4,883,968)
Net realized gains on investments (129,123,874) (122,031,385)
--------------- ---------------
Total distributions (133,519,884) (126,915,353)
--------------- ---------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions 55,329,487 108,821,914
--------------- ---------------
Total increase in net assets 45,110,669 200,751,627
NET ASSETS:
Beginning of year 1,351,090,310 1,150,338,683
--------------- ---------------
End of year $ 1,396,200,979 $ 1,351,090,310
=============== ===============
Undistributed net investment income $ 583,958 $ 2
--------------- ---------------
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26
---------- ---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income 0.05 0.05 0.05 0.08 0.10
Net realized and unrealized gains on investments 1.22 2.35 3.01 (a) 2.15 (a) 2.71
Provision for federal income tax -- -- (0.36) (0.13) --
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 1.27 2.40 2.70 2.10 2.81
---------- ---------- ---------- ---------- ----------
Less Distributions from:
Net investment income (0.05) (0.05) (0.05) (0.08) (0.10)
Realized capital gains (1.34) (1.35) (1.28) (1.10) (0.94)
---------- ---------- ---------- ---------- ----------
Total Distributions (1.39) (1.40) (1.33) (1.18) (1.04)
---------- ---------- ---------- ---------- ----------
Change due to rights offering (b) -- (0.10) -- -- --
Impact of shares issued in dividend reinvestment (c) (0.08) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions, Reinvestments and Rights Offering (1.47) (1.50) (1.33) (1.18) (1.04)
---------- ---------- ---------- ---------- ----------
Net asset value at end of year $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03
========== ========== ========== ========== ==========
Market Price at end of year $ 11.063 $ 12.938 $ 13.313 $ 11.250 $ 10.875
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 10.2% 19.8% 26.6% 21.7% 31.8%
Based on market price (4.4)% 9.1% 34.4% 16.2% 41.4%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $1,396 $1,351 $1,150 $988 $872
Ratio of expenses to average net assets 0.97% 1.00% 1.01% 1.03% 1.06%
Ratio of net investment income to
average net assets 0.37% 0.39% 0.38% 0.73% 0.92%
Portfolio turnover rate 90% 76% 99% 70% 54%
</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) Effect of payment of a portion of distributions in newly issued shares
valued at a discount from net asset value.
(d) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
See Notes to Financial Statements.
32
<PAGE>
Notes to Financial Statements December 31, 1999
- --------------------------------------------------------------------------------
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.
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.
33
<PAGE>
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
NOTE 3. CAPITAL TRANSACTIONS
During the years ended December 31, 1999, and December 31, 1998,
distributions in the amount of $55,329,487 and $53,655,255 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 4,579,753 and
4,317,097 shares, respectively. 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.
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, 1999 were $1,191,772,488 and
$1,261,611,854, respectively.
The Fund may enter into repurchase agreements and require the seller of the
instrument to maintain on deposit with the Fund's custodian bank or in the
Federal Reserve Book-Entry System securities in the amount at all times equal to
or in excess of the value of the repurchase agreement, plus accrued interest.
The Fund may experience costs and delays in liquidating the collateral if the
issuer defaults or enters bankruptcy.
NOTE 5. DISTRIBUTIONS TO SHAREHOLDERS
All-Star currently has a policy of paying distributions on its common shares
totaling approximately 10% of its net asset value per year, payable in four
quarterly distributions of 2.5% of All-Star's net asset value at the close of
the New York Stock Exchange on the Friday prior to each quarterly declaration
date.
Distributions to shareholders are recorded on the ex-dividend date. Income
and capital gain distributions are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting principles.
Reclassifications are made to the Fund's capital accounts to reflect income and
gains available for distribution (or available capital loss carryovers) under
income tax regulations.
CHANGE IN INDEPENDENT AUDITOR
Based on the recommendation of the Audit Committee of the Fund on June 18, 1999,
the Board of Trustees determined not to retain KPMG Peat Marwick LLP (KPMG) as
the Fund's independent auditor and voted to appoint PricewaterhouseCooopers LLP
for the fiscal year ended December 31, 1999. During the two most recent fiscal
years, KPMG's audit reports contained no adverse opinion or disclaimer of
opinion; nor were its reports qualified or modified as to uncertainty, audit
scope, or accounting principle. Further, in connection with its audits for the
two most recent fiscal years, there were no disagreements between the Fund and
KPMG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which if not resolved to the
satisfaction of KPMG would have caused it to make reference to the disagreements
in its report on the financial statements for such years.
34
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and the Trustees of Liberty All-Star Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations, changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Liberty All-Star Equity Fund (the "Fund") at
December 31, 1999, the results of its operations, the changes in its net assets
and the financial highlights for the period then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements and the financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion based on our audit. We conducted our audit of these
financial statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of portfolio positions at December 31, 1999
by correspondence with the custodian and brokers, provides a reasonable basis
for the opinion expressed above. The financial statements of the Fund for
periods prior to January 1, 1999 were audited by other independent accountants
whose report dated February 12, 1999 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2000
35
<PAGE>
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, c/o EquiServe, 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.
36
<PAGE>
Tax Information (Unaudited)
- --------------------------------------------------------------------------------
All 1999 distributions whether received in cash or shares of the Fund consist of
the following:
(1) ordinary income and
(2) long-term capital gains distributions
Below is a table that details the breakdown of each 1999 distribution for
federal income tax purposes.
TAX STATUS OF 1999 DISTRIBUTIONS
- --------------------------------------------------------------------------------
ORDINARY INCOME
---------------------------
NET SHORT-TERM LONG-TERM
AMOUNT INVESTMENT CAPITAL CAPITAL
DATE PAID PER SHARE INCOME GAINS GAINS
- --------------------------------------------------------------------------------
03/22/99 $0.34 -- 19.56% 80.44%
- --------------------------------------------------------------------------------
07/06/99 $0.37 12.51% 19.19% 68.30%
- --------------------------------------------------------------------------------
10/04/99 $0.34 -- 14.12% 85.88%
- --------------------------------------------------------------------------------
01/03/00 $0.34 -- 13.91% 86.09%
- --------------------------------------------------------------------------------
FOR CORPORATE SHAREHOLDERS
- --------------------------------------------------------------------------------
80% of the ordinary income dividends qualify for the 70% dividend received
deduction available for corporations for the year ended December 31, 1999.
37
<PAGE>
Notes
- --------------------------------------------------------------------------------
38
<PAGE>
Notes
- --------------------------------------------------------------------------------
39
<PAGE>
Notes
- --------------------------------------------------------------------------------
40
<PAGE>
[LOGO] LIBERTY [LOGO] USA
ALL*STAR Listed
----------- NYSE
EQUITY FUND THE NEW YORK STOCK EXCHANGE
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: www.libertyallstar.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers, LLP
160 Federal 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 c/o EquiServe
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
Internet: www.equiserve.com
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
William R. Parmentier, Jr., President and Chief Executive Officer
Christopher S. Carabell, Vice President
Mark T. Haley, Vice President
Timothy J. Jacoby, Treasurer
Nancy L. Conlin, Secretary
J. Kevin Connaughton, Controller
* 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
<PAGE>
[GRAPHIC OMITTED]
[LOGO] LIBERTY [LOGO] USA
ALL*STAR Listed
----------- NYSE
EQUITY FUND THE NEW YORK STOCK EXCHANGE
A MEMBER OF THE
CLOSED-END
FUND
ASSOCIATION, INC.
WWW.CLOSED-ENDFUNDS.COM
Liberty Asset Management Company, Fund Manager
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-800-LIB-FUND (1-800-542-3863)
Internet: www.libertyallstar.com
LBTCM-AR-00
