LIBERTY ALL-STAR® EQUITY FUND
Periods Ended September 30, 2015 (Unaudited)

Fund Statistics
Net Asset Value (NAV)	$5.91
Market Price	$5.08
Discount	-14.0%

	Quarter	Year-to-Date
Distributions*	$0.14	$0.38
Market Price Trading Range	$4.43 to $5.92	$4.43 to $6.04
Premium/(Discount) Range	-12.6% to -15.2%	-11.8% to -15.2%

Performance
Shares Valued at NAV with Dividends Reinvested	-8.78%	-7.67%
Shares Valued at Market Price with Dividends Reinvested	-9.32%	-9.23%
Dow Jones Industrial Average	-6.98%	-6.95%
Lipper Large-Cap Core Mutual Fund Average	-7.24%	-6.23%
NASDAQ Composite Index	-7.09%	-1.61%
S&P 500® Index	-6.44%	-5.29%

Liberty All-Star® Equity Fund

President's Letter

Fellow Shareholders:

October 2015

 

The third quarter of 2015 was marked by highly volatile trading of a magnitude that has not been seen in recent years. August, in particular, roiled financial markets, as the S&P 500® Index lost 6.03 percent, its worst monthly performance in more than three years. On five trading days that month, the S&P 500® moved up or down by more than 2 percent. At the close of the quarter, the S&P 500® was off 6.44 percent, the NASDAQ Composite Index declined 7.09 percent and the widely followed Dow Jones Industrial Average (DJIA) was down 6.98 percent. The reversals pulled all three indices into negative territory for the first nine months of the year.

During the quarter, investors were concerned with a number of factors, both domestic and international. A primary source of worry was a slowdown in China's economy, which depressed commodity prices (oil slipped below $40 per barrel in the U.S. at one point) and raised the possibility that the country would buy goods and services at a much-reduced level. China surprised financial markets on August 11 by announcing a devaluation of its currency, and its attempts to intervene and settle its own highly volatile stock market only served to heighten fears of a serious retrenchment in the world's second-largest economy. China's problems traveled quickly to the U.S. because of their implications for the economy and future corporate earnings. The high value of the U.S. dollar relative to other countries' currencies was also seen as a hindrance to the export sector of the economy. In addition, uncertainty about interest rates kept investors on edge. The Federal Reserve was believed to be moving toward a quarter-point increase in the federal funds rate, but the upheaval in financial markets forestalled any action and prolonged the uncertainty about when a rate increase would finally go into effect. While geopolitical tensions and ongoing problems, such as the Greek debt dilemma, remained unresolved, they faded in importance as newer worries emerged and captured investors' attention.

Liberty All-Star^® Equity Fund's quarterly results reflected the same investor fears that hit global financial markets. The Fund returned -8.78 percent with shares valued at net asset value (NAV) with dividends reinvested and -9.32 percent with shares valued at market price with dividends reinvested. As noted, the S&P 500® Index returned -6.44 percent, the NASDAQ Composite returned -7.09 percent and the DJIA returned -6.98 percent. The Lipper Large-Cap Core Mutual Fund Average returned -7.24 percent. The discount at which Fund shares traded relative to their NAV widened slightly over the quarter, ranging from -12.6 percent to -15.2 percent.

As shareholders know, the Fund's multi-manager structure allocates Fund assets among three value managers and two growth managers. Fund management has been disappointed with the performance of the assets allocated to value style investing and, as part of our ongoing monitoring of investment managers, decided during the quarter that it was appropriate to make a change. Thus, effective September 14, the Board of Trustees appointed Delaware Investments as one of the Fund's three value style managers replacing Schneider Capital Management. We will offer a more extensive introduction to the new manager in our annual report for 2015.

 

Third Quarter Report (Unaudited)  |  September 30, 2015

1

President's Letter

Liberty All-Star® Equity Fund

For the second consecutive quarter, the Fund's distribution to shareholders was $0.14 per share. The previous distribution of $0.10 per share was raised to $0.14 in the second quarter. This represents an increase in the Fund's distribution policy from an annual rate of approximately 6 percent (1.5 percent quarterly) of NAV to approximately 8 percent (2 percent quarterly). The Fund's distribution policy has been in place since 1988 and is a major component of the Fund's total return. These distributions add up to $25.04 since 1987 (the Fund's first full calendar year of operations). We would emphasize that shareholders must include these distributions when determining the return on their investment in the Fund.

The third quarter was a difficult one for global financial market participants, including Liberty All-Star^® Equity Fund. As to the markets, we are pleased to see the fourth quarter get off to a more stable start, and we are hopeful that more tranquil conditions will settle in. As to the Fund, the managers will continue to practice their disciplines and we at Liberty All-Star^® Equity Fund will remain committed to the best long-term interests of our shareholders.

Sincerely,

		Rights Offerings
Year	Per Share Distributions	Month Completed	Shares Needed to Purchase One Additional Share	Subscription Price	Tax Credits1
1988	$0.64
1989	0.95
1990	0.90
1991	1.02
1992	1.07	April	10	$10.05
1993	1.07	October	15	10.41	$0.18
1994	1.00	September	15	9.14
1995	1.04
1996	1.18				0.13
1997	1.33				0.36
1998	1.40	April	20	12.83
1999	1.39
2000	1.42
2001	1.20
2002	0.88	May	10	8.99
2003	0.78
2004	0.89	July	102	8.34
2005	0.87
2006	0.88
2007	0.90	December	10	6.51
2008	0.65
20093	0.31
2010	0.31
2011	0.34
2012	0.32
2013	0.35
2014	0.39
2015
1st Quarter	0.10
2nd Quarter4	0.14
3rd Quarter	0.14
Total	$23.86

Top 20 Holdings*	Percent of Net Assets
Google, Inc., Class A & C	2.44%
Facebook, Inc., Class A	1.92
Salesforce.com, Inc.	1.84
Amazon.com, Inc.	1.57
Visa, Inc., Class A	1.43
CVS Health Corp.	1.40
Microsoft Corp.	1.37
JPMorgan Chase & Co.	1.34
Metlife, Inc.	1.32
Cisco Systems, Inc.	1.27
Alexion Pharmaceuticals, Inc.	1.25
BB&T Corp.	1.21
Johnson Controls, Inc.	1.21
Intel Corp.	1.19
Johnson & Johnson	1.18
Occidental Petroleum Corp.	1.14
State Street Corp.	1.13
Hewlett-Packard Co.	1.10
Gilead Sciences, Inc.	1.06
The Walt Disney Co.	1.05
	27.42%

Economic Sectors*	Percent of Net Assets
Financials	21.87%
Information Technology	20.66
Health Care	16.21
Consumer Discretionary	15.15
Energy	8.54
Consumer Staples	7.43
Industrials	5.63
Materials	1.34
Telecommunication Services	1.21
Utilities	0.67
Other Net Assets	1.29
	100.00%

	Shares
Security Name	Purchases (Sales)	Held as of 9/30/15
Purchases
Exxon Mobil Corp.	79,150	123,925
J.B. Hunt Transport Services, Inc.	78,177	78,177
Regions Financial Corp.	511,475	614,950
Sales
Diageo PLC	(51,093)	0
The Estee Lauder Cos., Inc., Class A	(76,944)	0
Precision Castparts Corp.	(25,780)	0
Rackspace Hosting, Inc.	(187,458)	0
Royal Caribbean Cruises Ltd.	(59,032)	20,576

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As of September 30, 2015 (Unaudited)

 

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As of September 30, 2015 (Unaudited)

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As of September 30, 2015 (Unaudited)

 

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As of September 30, 2015 (Unaudited)

 

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As of September 30, 2015 (Unaudited)

 

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As of September 30, 2015 (Unaudited)

 

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As of September 30, 2015 (Unaudited)

 

 

Security Valuation

Equity securities are valued at the last sale price at the close of the principal exchange on which they trade, except for securities listed on the NASDAQ Stock Market LLC ("NASDAQ"), which are valued at the NASDAQ official closing price. Unlisted securities or listed securities for which there were no sales during the day are valued at the closing bid price on such exchanges or over-the-counter markets.

Cash collateral from securities lending activity is reinvested in the State Street Navigator Securities Lending Prime Portfolio, a registered investment company under the Investment Company Act of 1940 (the "1940 Act"), which operates as a money market fund in compliance with Rule 2a-7 under the 1940 Act. Shares of registered investment companies are valued daily at that investment company's net asset value per share. Repurchase agreements are valued at cost, which approximates fair value.

The Fund's investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value according to procedures adopted by the Fund's Board of Trustees (the "Board"). When market quotations are not readily available, or in management's judgment they do not accurately reflect fair value of a security, or an event occurs after the market close but before the Fund is priced that materially affects the value of a security, the security will be valued by the Advisor, ALPS Advisors, Inc. (the "Advisor"), using fair valuation procedures established by the Board. Examples of potentially significant events that could materially impact a Fund's net asset value include, but are not limited to: single issuer events such as corporate actions, reorganizations, mergers, spin-offs, liquidations, acquisitions and buyouts; corporate announcements on earnings or product offerings; regulatory news; and litigation and multiple issuer events such as governmental actions; natural disasters or armed conflicts that affect a country or a region; or significant market fluctuations. Potential significant events are monitored by the Advisor, Sub-Advisers and/or the Valuation Committee through independent reviews of market indicators, general news sources and communications from the Fund's custodian.

Security Transactions

Security transactions are recorded on trade date. Cost is determined and gains/(losses) are based upon the specific identification method for both financial statement and federal income tax purposes.

Income Recognition

Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date.

The Fund estimates components of distributions from real estate investment trusts ("REITs"). Distributions received in excess of income are recorded as a reduction of the cost of the related investments. Once the REIT reports annually the tax character of its distributions, the Fund revises its estimates. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains.

Repurchase Agreements

The Fund engages in repurchase agreement transactions with institutions that the Fund's investment advisor has determined are creditworthy. The Fund, through its custodian, receives delivery of underlying securities collateralizing a repurchase agreement. Collateral is at least equal, at all times, to the value of the repurchase obligation, including interest. A repurchase agreement transaction involves certain risks in the event of default or insolvency of the counterparty. These risks include possible delays or restrictions upon a Fund's ability to dispose of the underlying securities and a possible decline in the value of the underlying securities during the period while the Fund seeks to assert its rights. These collateral agreements mitigate the counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.

Repurchase agreements are entered into by the Fund under a Master Repurchase Agreement ("MRA") which permits the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due or from the Fund.

Lending of Portfolio Securities

The Fund may lend its portfolio securities only to borrowers that are approved by the Fund's securities lending agent, State Street Bank & Trust Co. ("SSB"). The Fund will limit such lending to not more than 30% of the value of its total assets. The borrower pledges and maintains with the Fund collateral consisting of cash (U.S. Dollar only), securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, or by irrevocable bank letters of credit issued by a person other than the borrower or an affiliate of the borrower. The initial collateral received by the Fund is required to have a value of no less than 102% of the market value of the loaned securities for securities traded on U.S. exchanges and a value of no less than 105% of the market value for all other securities. The collateral is maintained thereafter, at a market value equal to no less than 100% of the current value of the securities on loan. The market value of the loaned securities is determined at the close of each business day and any additional required collateral is delivered to the Fund on the next business day. During the term of the loan, the Fund is entitled to all distributions made on or in respect of the loaned securities. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions.

Any cash collateral received is reinvested in a money market fund managed by SSB as disclosed in the Fund's Schedule of Investments. Non-cash collateral, in the form of securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, is not disclosed in the Fund's Schedule of Investments as it is held by the lending agent on behalf of the Fund, and the Fund does not have the ability to re-hypothecate these securities. As of September 30, 2015, the market value of securities on loan was $16,421,676, and the total cash collateral and non-cash collateral received was $16,784,062 and $0, respectively.

The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate these risks, the Fund benefits from a borrower default indemnity provided by SSB. SSB's indemnity allows for full replacement of securities lent. However, the Fund could suffer a loss if the value of the investments purchased with cash collateral falls below the value of the cash collateral received.

Fair Value Measurements

The Fund discloses the classification of its fair value measurements following a three-tier hierarchy based on the inputs used to measure fair value. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.

 

16	www.all-starfunds.com

Valuation techniques used to value the Fund's investments by major category are as follows:

Equity securities are categorized as Level 1 in the hierarchy. In the event there were no sales during the day or closing prices are not available, securities are valued at the mean of quoted bid and ask prices on such day and are generally categorized as Level 2 in the hierarchy. Repurchase agreements are valued at cost, which approximates fair value, and are categorized as Level 2 in the hierarchy.

Various inputs are used in determining the value of the Fund's investments as of the end of the reporting period. When inputs used fall into different levels of the fair value hierarchy, the level in the hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The designated input levels are not necessarily an indication of the risk or liquidity associated with these investments.

These inputs are categorized in the following hierarchy under applicable financial accounting standards:

 

Notes to Schedule of Investments

Liberty All-Star® Equity Fund

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September 30, 2015 (Unaudited)

 

The following is a summary of the inputs used to value the Fund's investments as of September 30, 2015:

 

 

The Fund recognizes transfers between levels as of the end of the period. For the period ended September 30, 2015, the Fund did not have any transfers between Level 1 and Level 2 securities. The Fund did not have any securities which used significant unobservable inputs (Level 3) in determining fair value during the period.

Indemnification

In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnities. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims against the Fund. Also, under the Fund's organizational documents and by contract, the Trustees and Officers of the Fund are indemnified against certain liabilities that may arise out of their duties to the Fund. However, based on experience, the Fund expects the risk of loss due to these warranties and indemnities to be minimal.

Shareholder Meeting Results

On August 27, 2015, the Annual Meeting of Shareholders of the Fund was held to elect two Trustees and to consider a shareholder proposal. On May 29, 2015, the record date for the meeting, the Fund had outstanding 179,951,943 shares of beneficial interest. The votes cast at the meeting were as follows:

 

Proposal 3 – Shareholder proposal:

Dow Jones Industrial Average

A price-weighted measure of 30 U.S. blue-chip companies.

Lipper Large-Cap Core Mutual Fund Average

The average of funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) above Lipper's U.S. domestic equity large-cap floor. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500^® Index.

NASDAQ Composite Index

Measures all NASDAQ domestic and international based common type stocks listed on the NASDAQ Stock Market.

S&P 500^® Index

A large cap U.S. equities index that includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

An investor cannot invest directly in an index.

 

 

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