SECOND QUARTER REPORT - JUNE 30, 2002
[GRAPHIC]
[ALL-STAR(SM) EQUITY FUND LOGO]
Q2 2002
LIBERTY ALL-STAR EQUITY FUND
LIBERTY ALL-STAR EQUITY FUND
FUND STATISTICS AND PERFORMANCE 2ND QUARTER 2002 YEAR-TO-DATE
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Period End Net Asset Value (NAV) -- $8.49
Period End Market Price -- $8.58
Period End Premium -- 1.1%
Dividends Paid $0.24 $0.49
Market Price Trading Range $8.00 to $11.09 $8.00 to $12.39
Premium/(Discount) Range (0.2)% to 7.4% (0.2)% to 20.4%
Shares Valued at NAV (15.6)% (15.5)%
Shares Valued at NAV
with Dividends Reinvested (15.4)% (15.5)%
Shares Valued at Market Price
with Dividends Reinvested (19.1)% (18.0)%
Lipper Large-Cap Core
Mutual Fund Average (13.4)% (13.7)%
S&P 500 Index (13.4)% (13.2)%
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in the Fund's
rights offering were exercised. Figures shown for the unmanaged S&P 500 Index
are total returns, including income. Past performance cannot predict future
results.
PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS: JULY 2002
As markets closed on Friday, June 28, investors had endured yet another
disappointing quarter. Brief rallies in April and May proved to be
unsustainable, and they gave way to extreme selling pressure. Of note, not a
single sector represented in the S&P 500 Index posted gains during June. It was
the type of quarter that gave birth to the phrase "there was no place to hide"
and, indeed, stocks declined virtually across the board, regardless of
investment style, capitalization range or sector. Only gold and real estate
funds provided positive returns in the domestic equity universe.
Two key market indices, the S&P 500 Index and the Nasdaq Composite, now
stand at five-year lows. Between March 31, 2000, when the market was near its
peak, and June 30, 2002, the S&P 500 is off 32.0 percent. All-Star's benchmark,
the Lipper Large-Cap Core Mutual Fund Average, is down 33.1 percent over the
same period. Although we take little comfort from it, Liberty All-Star Equity
Fund has fared better on a relative basis. The Fund's net asset value (NAV) with
dividends reinvested declined 24.5 percent between March 31, 2000, and June 30,
2002. All-Star's market price (NYSE: USA) with dividends reinvested has held up
significantly better, being down just 1.2 percent over the same period.
At times such as this, some perspective may be helpful. There was no doubt
that the stock market was driven to extremes by the euphoric mood of the latter
1990s. Today, the reverse is developing - the mood is becoming overly
pessimistic. Investors are ignoring improving underlying fundamentals and
letting emotion overcome rational decision making. The fact is, the economy is
recovering, albeit at an uneven pace. Interest rates are at record lows. With
interest rates so low, the housing and auto markets have strong support.
Inflation is benign. Productivity gains are strong. Industrial production is
expanding. Inventories are low. The unemployment rate has risen, but is not much
above its recent record low. And a moderate decline in the value of the dollar
is making U.S. corporations more competitive in foreign markets.
Offsetting that, of course, are terrorism fears, accounting scandals,
corporate wrongdoing, profitability/valuation concerns and a lack of capital
spending. All of these are legitimate issues, no doubt about it. However, it is
worth observing that
ALL STAR EQUITY FUND 1
PRESIDENT'S LETTER
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just a few years ago all kinds of troubling news had virtually no effect on the
stock market. The Oklahoma City bombing, the near impeachment of the President
of the United States, the Asian economic crisis, war in Yugoslavia, and major
debacles at Kidder Peabody, Salomon Brothers and Long-Term Capital Management -
the market hiccuped from time to time, but shrugged off all of those events and
continued to rise.
Going back a little farther into history, many are comparing the current
stock market to the bear market of 1973-74. Once again, however, they ignore the
underlying situation. In contrast to today's good economy and low inflation, in
'73-74 we were enduring oil embargoes, rampant inflation, high interest rates
and - talk about scandals - the Watergate investigation, leading to the
resignation of the President of the United States.
Eventually, the turmoil will subside and normalcy will return to the stock
market. Quality companies will once again be recognized and investors will be
rewarded over time. One manager who continues to practice a disciplined
investment approach is Mark E. Donovan of Boston Partners Asset Management,
L.P., one of the Fund's five investment managers. I invite you to read our
interview with him, beginning on page 8.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
ALL STAR EQUITY FUND 2
INVESTMENT GROWTH as of June 30, 2002
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[CHART]
Includes Additional Investments Net Asset Value of Shares Acquired Net Asset Value Per Share
Made Through Rights Offerings Through Distribution Reinvestment Plus Distributions Paid
$64.93(2) $46.90(2) $26.44(1)
[CHART]
BOTTOM MIDDLE TOP
------ ------ ---
1/31/96 10.83 10.83 10.83
2/29/96 11.02 11.02 11.02
3/31/96 11.09 11.09 11.09
4/30/96 11.38 11.38 11.38
5/31/96 11.6 11.60 11.60
6/30/96 11.31 11.31 11.31
7/31/96 10.67 10.67 10.67
8/31/96 11.16 11.16 11.16
9/30/96 11.9 11.90 11.90
10/31/96 12.01 12.01 12.01
11/30/96 12.63 12.85 12.85
12/31/96 12.29 12.48 12.48
1/31/97 12.88 13.13 13.13
2/28/97 12.74 12.97 12.97
3/31/97 12.14 12.33 12.33
4/30/97 12.49 12.73 12.73
5/31/97 13.12 13.45 13.45
6/30/97 14.02 14.51 14.51
7/31/97 14.93 15.57 15.57
8/31/97 14.56 15.14 15.14
9/30/97 15.23 15.95 15.95
10/31/97 14.73 15.35 15.35
11/30/97 14.65 15.25 15.25
12/31/97 15.15 15.88 15.88
1/31/98 15.09 15.81 15.81
2/28/98 16.27 17.26 17.26
3/31/98 16.97 18.15 18.15
4/30/98 17.14 18.37 18.37
5/31/98 16.2 17.18 17.18
6/30/98 17 18.27 18.27
7/31/98 16.3 17.36 19.09
8/31/98 13.37 13.54 14.89
9/30/98 14.37 14.87 16.35
10/31/98 15.38 16.22 17.84
11/30/98 15.48 16.36 17.99
12/31/98 16.64 18.02 19.82
1/31/99 16.78 18.21 20.03
2/28/99 15.91 17.01 18.71
3/31/99 16.2 17.47 19.22
4/30/99 16.78 18.30 20.13
5/31/99 16.2 17.47 19.22
6/30/99 17.06 18.78 20.67
7/31/99 16.48 17.93 19.73
8/31/99 15.87 17.04 18.75
9/30/99 16.17 17.53 19.29
10/31/99 16.85 18.55 20.41
11/30/99 16.9 18.63 20.50
12/31/99 18.28 20.87 22.97
1/31/00 17.6 19.82 21.81
2/29/00 18.25 20.83 22.92
3/31/00 19.5 22.93 25.24
4/30/00 19.23 22.50 24.76
5/31/00 18.1 20.69 22.77
6/30/00 19.39 22.85 25.15
7/31/00 19.07 22.33 24.57
8/31/00 19.9 23.69 26.07
9/30/00 19.76 23.54 25.90
10/31/00 18.95 22.17 24.39
11/30/00 16.53 18.07 19.89
12/31/00 17.04 18.97 20.88
1/31/01 17.45 19.69 21.67
2/28/01 15.51 16.30 17.94
3/31/01 14.75 14.95 16.46
4/30/01 15.95 17.11 18.84
5/31/01 15.79 16.82 18.52
6/30/01 16.08 17.34 19.09
7/31/01 15.69 16.62 18.30
8/31/01 14.97 15.41 16.96
9/30/01 13.63 12.85 15.74
10/31/01 14.14 13.82 16.94
11/30/01 14.95 15.37 18.84
12/31/01 15.41 16.25 19.92
1/31/02 14.99 15.43 18.91
2/28/02 14.6 14.67 17.98
3/31/02 15.35 16.15 19.79
4/30/02 14.94 15.33 18.79
5/31/02 14.43 14.30 17.53
6/30/02 13.85 13.12 16.09
(1). NAV of one share of All-Star as of 6/30/02 plus distributions paid since
inception.
(2). To evaluate your investment in the Fund, these values should be used. Each
shows how your investment at NAV has fared by reinvesting the Fund's
distributions. The upper value includes additional investments made through
the rights offerings in 1992, 1993, 1994, 1998 and 2002.
The above chart illustrates the NAV growth of an original share of the Fund from
the Fund's inception date through June 30, 2002. The bottom region of the chart
reflects NAV growth assuming all distributions were received in cash and not
reinvested back into the Fund. The value of an original share grew to $26.44
(current NAV of $8.49 plus distributions paid since inception totaling $17.95,
which includes tax credits of $0.67 on retained capital gains).
Moving up the chart, the middle region depicts additional value added
through the reinvestment and compounding of distributions. The value of an
original share with distributions reinvested grew to $46.90 (5.524 shares times
the current NAV of $8.49).
On five occasions, the Fund has allowed the purchase of additional shares
at a discount through rights offerings. The top region illustrates the
additional value added assuming participation in all the rights offerings and
the reinvestment of all distributions. The value of an original share grew to
$64.93 (7.648 shares times the current NAV of $8.49).
ALL STAR EQUITY FUND 3
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENTS
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SHARES SHARES MARKET TOTAL
SHARES PER PURCHASED ACQUIRED SHARES NAV(1) TOTAL PRICE MARKET
OWNED AT SHARE THROUGH THROUGH OWNED PER SHARE NAV OF PER SHARE PRICE OF
BEGINNING DISTRI- REINVESTMENT RIGHTS AT END AT END SHARES AT END SHARES
YEAR OF PERIOD BUTIONS PROGRAM OFFERING OF PERIOD OF PERIOD OWNED OF PERIOD OWNED
-----------------------------------------------------------------------------------------------------------
1987 1.000 $1.18 0.140 - 1.140 $7.90 $9.01 $6.00 $6.84
1988 1.140 0.64 0.107 - 1.247 8.29 10.34 7.25 9.04
1989 1.247 0.95 0.156 - 1.403 9.58 13.44 8.25 11.57
1990 1.403 0.90 0.167 - 1.570 8.92 14.00 7.75 12.17
1991 1.570 1.02 0.171 - 1.741 11.20 19.50 10.75 18.72
1992 1.741 1.07 0.199 0.179(2) 2.119 10.78 22.84 11.125 23.57
1993 2.119 1.25(3) 0.266 0.138(2) 2.523 10.40 26.24 11.125 28.07
1994 2.523 1.00 0.277 0.155(2) 2.955 9.26 27.36 8.50 25.12
1995 2.955 1.04 0.310 - 3.265 11.03 36.01 10.875 35.51
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
1998 4.169 1.40 0.487 0.173(2) 4.829 14.22 68.67 12.938 62.48
1999 4.829 1.39 0.569 - 5.398 14.02 75.68 11.063 59.72
2000 5.398 1.42 0.651 - 6.049 13.61 82.33 12.375 74.86
2001 6.049 1.20 0.703 - 6.752 10.65 71.91 11.09 74.88
2002
1st Quarter 6.752 0.25 0.151 - 6.903 10.40 71.79 11.00 75.93
2nd Quarter 6.903 0.24 0.207 0.538(2) 7.648 8.49 64.93 8.58 65.62
(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.
2002: Rights offering completed in May 2002. One share offered at $8.99
for every 10 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 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 made
under 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 distributed under the 10 percent pay-out
policy, the Fund may, in 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.
ALL STAR EQUITY FUND 4
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
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THE FUND'S FIVE INVESTMENT MANAGERS AND
THE INVESTMENT STYLES THEY PRACTICE ARE:
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.
OPPENHEIMER CAPITAL/VALUE
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital that trade below their intrinsic value.
SCHNEIDER CAPITAL MANAGEMENT/VALUE
Companies that are overlooked and undervalued where the firm expects a rebound
in earnings.
MASTRAPASQUA & ASSOCIATES/GROWTH
Companies whose valuations do not reflect the potential for accelerating
earnings and cash flow growth.
TCW INVESTMENT MANAGEMENT COMPANY/GROWTH
Companies that have superior sales growth, leading and/or rising market shares,
and high and/or rising profit margins.
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 investment managers. These differences are a reflection of the fact
that each pursues a different investment style. The shaded column highlights the
characteristics of the Fund as a whole, while the final column shows portfolio
characteristics for the S&P 500 Stock Index.
PORTFOLIO CHARACTERISTICS INVESTMENT STYLE SPECTRUM
AS OF JUNE 30, 2002
(UNAUDITED) VALUE GROWTH
BOSTON OPPEN- MASTRA- TOTAL S&P
SCHNEIDER PARTNERS HEIMER PASQUA TCW FUND 500 INDEX
Number of Holdings 44 36 37 50 26 165 500
Percent of Holdings in Top 10 47% 45% 55% 28% 58% 20% 25%
Weighted Average Market
Capitalization (billions) $6 $34 $58 $35 $66 $39 $85
Average Five-Year
Earnings Per Share Growth 13% 10% 13% 17% 24% 14% 10%
Dividend Yield 1.1% 1.2% 1.8% 0.5% 0.4% 1.0% 1.6%
Price/Earnings Ratio 14x 17x 17x 27x 33x 20x 22x
Price/Book Value Ratio 1.7x 3.1x 3.3x 4.1x 5.5x 3.5x 4.5x
ALL STAR EQUITY FUND 5
TOP 50 HOLDINGS
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RANK AS RANK AS MARKET PERCENT OF
OF 6/30/02 OF 3/31/02 SECURITY NAME VALUE ($000) NET ASSETS
1 1 Freddie Mac $33,850 3.3%
2 2 The Progressive Corp. 26,999 2.7
3 4 Microsoft Corp. 24,406 2.4
4 5 Countrywide Credit Industries, Inc. 19,474 1.9
5 8 American International Group, Inc. 18,552 1.8
6 3 Citigroup, Inc. 18,418 1.8
7 9 Dell Computer Corp. 16,787 1.7
8 10 Aetna, Inc. 15,010 1.5
9 25 J.C. Penney Co., Inc. 14,960 1.5
10 28 Wells Fargo & Co. 14,117 1.4
11 6 Applied Materials, Inc. 13,139 1.3
12 12 Genentech, Inc. 12,683 1.3
13 7 Amgen, Inc. 11,844 1.2
14 42 Goldman Sachs Group, Inc. 11,575 1.1
15 21 Pharmacia Corp. 11,392 1.1
16 24 The Boeing Co. 10,917 1.1
17 13 Maxim Integrated Products, Inc. 10,721 1.1
18 36 Tate & Lyle PLC 10,602 1.0
19 23 XL Capital Ltd. 10,588 1.0
20 38 AmeriCredit Corp. 10,522 1.0
21 40 Cisco Systems, Inc. 9,998 1.0
22 14 Agilent Technologies, Inc. 9,578 0.9
23 17 The Home Depot, Inc. 9,544 0.9
24 59 International Game Technology 9,174 0.9
25 31 The Allstate Corp. 8,838 0.9
26 27 Transocean Sedco Forex, Inc. 8,716 0.9
27 43 Network Appliance, Inc. 8,703 0.9
28 20 Alcan, Inc. 8,671 0.9
29 54 Sears, Roebuck & Co. 8,558 0.8
30 45 UST, Inc. 8,456 0.8
31 18 Siebel Systems, Inc. 8,420 0.8
32 19 Intel Corp. 8,086 0.8
33 46 Wal-Mart Stores, Inc. 8,064 0.8
34 35 CSX Corp. 7,928 0.8
35 16 Burlington Resources, Inc. 7,927 0.8
36 83 General Dynamics Corp. 7,859 0.8
37 55 Ford Motor Co. 7,782 0.8
38 30 AFLAC, Inc. 7,680 0.8
39 26 Nabors Industries, Inc. 7,639 0.8
40 37 ACE Ltd. 7,514 0.7
41 56 3M Co. 7,380 0.7
42 52 FleetBoston Financial Corp. 7,117 0.7
43 39 3Com Corp. 7,030 0.7
44 48 Nucor Corp. 6,732 0.7
45 33 Paccar, Inc. 6,616 0.7
46 47 Stilwell Financial, Inc. 6,530 0.6
47 63 The Kroger Corp. 6,468 0.6
48 69 Quest Diagnostics, Inc. 6,454 0.6
49 49 Marathon Oil Corp. 6,346 0.6
50 50 Visteon Corp. 6,343 0.6
ALL STAR EQUITY FUND 6
MAJOR STOCK CHANGES IN THE SECOND QUARTER
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The following are the major ($4.0 million or more) stock changes--both purchases
and sales--that were made in the Fund's portfolio during the second quarter of
2002.
SHARES AS
SECURITY NAME PURCHASES (SALES) OF 6/30/02
PURCHASES
Alcon, Inc. 161,700 161,700
ALLTEL Corp. 85,400 85,400
AmeriCredit Corp. 134,200 375,100
Automatic Data Processing, Inc. 85,000 85,000
Caterpillar, Inc. 75,000 75,000
Federated Department Stores, Inc. 117,100 117,100
Goldman Sachs Group, Inc. 63,100 157,800
Liberty Media Corp., Class A 428,400 607,700
Microsoft Corp. 127,000 446,185
Motorola, Inc. 343,700 343,700
Qwest Communications International, Inc. 1,011,200 1,011,200
Sanmina-SCI Corp. 685,200 764,100
Siebel Systems, Inc. 207,300 592,100
Sun Microsystems, Inc. 600,000 941,200
Wells Fargo & Co. 82,000 282,000
SALES
Becton, Dickinson & Co. (131,900) 0
Burlington Resources, Inc. (111,100) 208,600
Clear Channel Communications, Inc. (140,600) 140,000
Devon Energy Corp. (82,400) 0
Sprint Corp. (FON Group) (525,700) 340,000
United States Steel Corp. (286,200) 0
ALL STAR EQUITY FUND 7
MANAGER INTERVIEW
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[PHOTO OF MARK E. DONOVAN]
MARK E. DONOVAN
Chair, Equity Strategy Committee
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Risk-averse Boston Partners likes stocks that bring together the three circles:
valuation, good fundamentals and a catalyst
BOSTON PARTNERS ASSET MANAGEMENT, L.P., IS ONE OF USA'S FIVE INVESTMENT
MANAGEMENT FIRMS, HAVING BEEN NAMED TO THE USA TEAM IN MAY 1998. BOSTON PARTNERS
IS A VALUE STYLE MANAGER INVESTING IN UNDERVALUED COMPANIES THAT HAVE SOUND
BUSINESS FUNDAMENTALS AND POSITIVE BUSINESS MOMENTUM. THE FIRM SEARCHES FOR
COMPANIES WITH LOW PRICE-TO-EARNINGS AND PRICE-TO-BOOK VALUE RATIOS WHERE A
CATALYST FOR POSITIVE CHANGE HAS BEEN IDENTIFIED. WE RECENTLY HAD THE
OPPORTUNITY TO VISIT WITH MARK E. DONOVAN, CFA, WHO WAS AMONG THE FOUNDERS OF
THE FIRM AND IS CHAIR OF THE EQUITY STRATEGY COMMITTEE.
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE PORTFOLIO MANAGER'S POSITION
AT THE TIME OF THE DISCUSSION (JULY 2002) AND ARE SUBJECT TO CHANGE.
LAMCO: At the beginning of the year, many knowledgeable investors predicted that
the stock market would be strong in the second half. Now, there's a lot of
backing away from that expectation as the market continues to dash investors'
hopes. What's your own "state of the market" position at mid-year?
DONOVAN: In the last 18 months there has been a bit of a disconnect between the
economy and corporate profitability. Last year, we had a recession that, when
all was said and done, was pretty mild by historic standards. Despite a fairly
modest shrinkage in GDP, we had a horrendous recession in corporate profits.
We're seeing that disconnect continue today. The economy is showing some signs
of strength, but the profit picture is not nearly as good. I would attribute
that to a number of factors, principally the pressure on profit margins in spite
of reasonably good demand.
LAMCO: Is that a result of extremely competitive circumstances or higher
operating costs?
DONOVAN: On the revenue line, there's excess capacity in many industries and
that results in low capacity utilization rates. In turn, that makes it difficult
to raise prices. Many companies are selling more units, but at lower prices. On
the expense line, there are a lot of areas where companies are experiencing cost
pressure. One is labor costs. Even though unemployment has been rising, it's
still relatively low. Even more than wage costs, benefits costs, particularly
health care, have become a major factor. Another is higher pension expense. For
a lot of big companies the pension plan was a profit center in the late
ALL STAR EQUITY FUND 8
MANAGER INTERVIEW
--------------------------------------------------------------------------------
1990s because of stock market gains. That pendulum is swinging the other way
now. More and more companies are not only seeing pension income evaporate, they
now have to contribute cash to their plans. In addition, insurance costs have
been extraordinarily high in the post-9/11 environment. Some companies are
paying 30 to 40 percent more for insurance, leading them to miss earnings
expectations.
In sum, we're in an environment where a variety of issues is making it
difficult to translate a healthier economic environment into improved
profitability.
LAMCO: In the All-Star roundtable last year, you said two concerns continue to
hang over the market: earnings and valuations. As it turns out, you were quite
prescient. Corporate earnings remain weak and valuations, despite recent
declines, remain above historic norms. In today's environment, are you finding
companies that meet all your other criteria and that also have solid earnings
prospects? And, do valuations have to go all the way back to their historic
levels before the market can establish a base and head higher?
DONOVAN: On the first point, the stock market has experienced a tremendous
compression in valuations over the last two-and-one-quarter years. In March 2000
at the peak of the NASDAQ bubble, you had a large population of very expensive
stocks. At the same time, one of the quirks of that environment was a very large
population of inexpensive stocks. There were value opportunities in abundance
because so many stocks had been grossly ignored during the NASDAQ frenzy. What
you've had since then is this tremendous compression in which those expensive
stocks have gotten much cheaper. Meanwhile, a lot of the real bargain stocks of
a couple of years ago have risen in value. As a result, we've seen everything
converge into the middle; that is, it seems like almost every stock we look at
today is priced right around 20 times earnings. With the market valuing
everything comparably, clearly the right thing to do is to climb the quality
scale. I mean if two companies are priced at the same price-to-earnings
multiple, you definitely want to own the one of better quality.
There have been some situations where certain stocks have run into
problems, real or perceived, and the market has absolutely trampled them from a
valuation perspective and in the process created some interesting bargains. We
are starting to nibble at some of those opportunities. Clearly, exhibit A would
be Tyco. We acknowledge that over the next three to six months Tyco will have
issues that are going to keep it in the category of a fairly controversial
stock. But, this is the kind of stock that looks very inexpensive to us on
[SIDENOTE]
"The economy is showing some signs of strength, but the profit picture is
not nearly as good. I would attribute that to a number of factors, principally
the pressure on profit margins in spite of reasonably good demand."
"...clearly the right thing to do [today] is to climb the quality scale. I
mean if two companies are priced at the same price-to-earnings multiple, you
definitely want to own the one of better quality."
ALL STAR EQUITY FUND 9
MANAGER INTERVIEW
--------------------------------------------------------------------------------
a three- to four-year basis.
Addressing the second part of the question about valuations retracing all
the way to their historic levels, we are believers in the concept of reversion
to the mean. We therefore expect that, over time, market valuations will trend
back towards historic norms.
LAMCO: As if the market didn't have enough woes, issues of corporate governance,
behavior and ethics have undermined investor confidence. How serious an issue is
this? Is it confined to a few headline-grabbing cases, or do you suspect it's
more widespread?
DONOVAN: I doubt that we've heard the last of this issue. I attribute this to
classic post-bubble behavior. I think there's been a lot of pressure throughout
the system as we went from the environment of the late 1990s with double digit
equity market returns to the negative returns of the last couple of years.
Portfolio managers feel pressure from their clients to produce the best possible
investment returns. That, in turn, causes the portfolio managers to put
tremendous pressure on the managements of the companies in their portfolios to
produce good numbers quarter after quarter. You also need to layer on the fact
that more senior managers are compensated by stock options, giving them an
extraordinary stake in the performance of the stock. So, it's this kind of
vicious cycle that leads to the type of corporate malfeasance we've been hearing
about over the last several months.
LAMCO: Do you think there's any one thing that needs to happen to restore
confidence, or is this something that's just going to have to work itself out
over time?
DONOVAN: I feel it probably needs to work itself out over time. I think
prosecution of some of the more egregious situations is going to be necessary to
restore confidence because people are going to need to see that meaningful
action has been taken.
LAMCO: In a tough market environment, value has been the more rewarding style
for more than two years now. Is there any particular aspect of the Boston
Partners' strategy, approach or process that has been particularly effective
over this period of time?
DONOVAN: We have always spent a great deal of time digging deep into financial
statements. We don't take reported earnings per share at face value; instead, we
look at the entire income statement, the cash flow statement, the balance sheet
and the footnotes to the financial statements. If you look at the problems that
have crept up as a result of companies' accounting gimmickry, there was evidence
of mischief to be found if you dug into the financial statements. One thing
we've paid a lot of attention to over the last couple of years is comparing a
company's earnings to its cash flow from operations. A classic case of this was
Enron. Even when Enron was reporting high levels of earnings on its income
statement, they were generating very little cash. We have always shied away from
companies such as that. That has very much been the case, as well, with
WorldCom, a name we stayed away from largely because we couldn't make sense of
the cash flow issues.
LAMCO: Do you think that value style investing could be in for a long period of
dominance, such as we saw from the growth style in the latter 1990s?
ALL STAR EQUITY FUND 10
MANAGER INTERVIEW
--------------------------------------------------------------------------------
DONOVAN: There has been a massive gap over the last two-and-one-quarter years
coming off the March 2000 peak. Over that time, the spread in returns between
value indices and growth indices has been astronomical. Of course, that was
preceded by a period of time when the spread between growth and value was
astronomical in favor of growth. From here, I think it's unlikely that we'll see
a continuation of this massive outperformance by value. However, I still feel
pretty good about the near-term prospects for value, given my earlier comment.
There are still quite a few expensive stocks out there, and I think avoiding
them is going to be critically important as this unwinding process continues. In
a tough market environment, the better performing managers are generally those
doing a better job of preserving capital. In that situation, I think value tends
to be the more effective of the two styles.
LAMCO: A weaker dollar is a good news/bad news kind of issue. From the
perspective of the companies in which you invest, how do you view it?
DONOVAN: Our investment process leads us to talk with a great many companies. By
and large, most are relieved to see the dollar weakening somewhat. For
export-driven companies, a weaker dollar makes it easier for them to compete in
global markets. On balance, it's going to help profitability. Unfortunately, the
dollar's weakness seems to be fueled by foreign investors deciding to move their
investments to other markets outside the U.S.
LAMCO: The viewpoint, then, is that some weakness helps U.S. companies compete
in foreign markets, but like anything you can have too much of a good thing?
DONOVAN: Yes, I think it's going to help earnings but probably hurt valuations.
It'll help the earnings line but maybe put some pressure on price-to-earnings
multiples as capital seems to be exiting this country.
LAMCO: The last time we interviewed you for a quarterly report was two years
ago. On that basis, would you revisit some basics of your firm - size, history,
ownership and types of clients?
DONOVAN: Boston Partners has just over $10 billion in assets under management
and about 90 employees. About 85 percent of the assets under management is in
equities and about 15 percent is in fixed income. All of our equity products are
based on a value discipline. The typical client for Boston Partners would be a
separately-managed institutional account. We started the firm seven years ago in
1995, and it has been an interesting ride ever since. What I mean is that we
went through a time when value investing was very much out of favor and now
we've seen it rotate into one of the best of times for value style investing. By
virtue of the fact that we stayed true to the discipline and didn't stray when
many others did, our investment style has had a very nice recovery in
performance the last couple of years. In addition, we're pleased that
[SIDENOTE]
"Our investment process leads us to talk with a great many companies. By and
large, most are relieved to see the dollar weakening somewhat."
ALL STAR EQUITY FUND 11
MANAGER INTERVIEW
--------------------------------------------------------------------------------
all of our equity products are ahead of their respective benchmarks since
inception in '95.
LAMCO: Can you highlight the basics of the value strategy that you're
implementing for Liberty All-Star Equity Fund?
DONOVAN: There are three key elements that we look for in a stock. Obviously, as
value managers we're very much attuned to valuation. We set price targets for
every stock we research and we will only buy a stock if we think it's priced at
least 15 percent below our valuation estimate. In determining the appropriate
target price for a stock, it's critical that we understand the fundamentals of
the business. Not all companies should be priced alike, so we focus on the
fundamental business characteristics. We look at a company's cash flow dynamics,
its growth opportunities, its competitive position and management's commitment
to building wealth for shareholders over time. The third characteristic that we
look for beyond attractive valuation and good fundamentals would be a catalyst
to unlock the value we've identified. We tend to favor companies where the
earnings estimates are rising and try to avoid situations where earnings
estimates are being cut. We also tend to favor companies that are launching some
type of corporate initiative, for instance, a corporate restructuring that we
think has the potential to unlock value. Other catalysts could be a share
repurchase, a divestiture of an underperforming business unit or an acquisition
that's going to enhance earnings. Ultimately, after a thorough analysis we ask
ourselves three questions: Is this a good business, is it selling at an
attractive price and can we identify a catalyst that is likely to rekindle
investor enthusiasm?
LAMCO: Do you find that in a difficult market environment, such as we're in,
that managements are more inclined to initiate a catalyst on the old theory that
I don't learn from my successes, I only learn from my mistakes? In other words,
when things are going well there might be less motivation to take those kinds of
actions and when things aren't going so well maybe the reasons are there for
management to act.
DONOVAN: That's a good point and it gets back to the comment I made about all
the pressures in the system right now. I think a lot of corporate managements
are feeling pressured to perform. As a result, we occasionally see companies
trying to force the issue too much and over-managing the business to create
catalysts that aren't necessarily in the best long-term interests of the
business. When I talk about a catalyst, we make a very important distinction
between catalysts that are going to legitimately help the earnings outlook on
both the short run and the long run. We try to avoid those situations where
management's actions are merely window dressing reflecting their own impatience
or a desire for a quick-fix.
LAMCO: An important part of the Boston Partners' approach is risk aversion. Can
you summarize your thinking on this point?
[SIDENOTE]
"We set price targets for every stock we research and we will only buy a stock
if we think it's priced at least 15 percent below our valuation estimate."
ALL STAR EQUITY FUND 12
MANAGER INTERVIEW
--------------------------------------------------------------------------------
DONOVAN: To us, the most important element of risk is the preservation of
capital. There are other aspects of risk that we certainly pay attention to,
volatility of returns, for example. But to us, the most important tenet of a
risk management program is "don't lose money" - not only on individual stocks,
but for the portfolio as a whole, too. The single most important element in
achieving that goal is maintaining a disciplined implementation of our value
philosophy. Of the stocks we look at and choose not to buy, the vast majority of
the time they are simply not priced inexpensively enough for us. We look at
every company from the perspective of downside risk versus upside opportunity.
We are simply not going to buy a stock that we determine holds a high level of
downside risk.
LAMCO: When you buy a company for at least a 15 percent discount to your
valuation estimate, you feel the risk has pretty much been stripped out?
DONOVAN: Precisely.
LAMCO: Let's turn to a couple of specific examples. What would be a classic
Boston Partners stock from those stocks that you own in your portion of the
All-Star portfolio?
DONOVAN: I would cite MBIA, an insurer of municipal bonds. If the Massachusetts
Turnpike Authority decides to issue bonds, it would, in all likelihood, approach
one of the major municipal bond insurers, MBIA being one of them. If MBIA chose
to insure that bond offering, the turnpike authority would pay a one-time
premium at the time of the offering and MBIA, in turn, would assure the timely
payments of interest and principal - making the bond offering a AAA-rated
transaction. We like MBIA because we like situations in which everybody wins.
The turnpike authority has an easier time selling its bond offering because of
MBIA's insurance wrapper. MBIA, over time, tends to earn about a 15 percent
return on equity, so clearly it wins. The bond investors win, too, because the
insurance takes substantial risk out of the equation.
The interesting thing that seems to occur with some regularity for both
MBIA and AMBAC, which is the other major municipal bond insurer, is they
periodically lose favor with investors. This usually occurs when there are
headline issues, for instance, when two large California utilities were in
financial difficulties a couple of years ago. MBIA had some exposure to the
bonds of the California utilities. Whenever these kinds of potential losses come
to investors' attention, the stocks tend to fall in price and get very
inexpensive. So, MBIA is a stock we purchased a couple of years ago under those
circumstances and it has been a very good performer. Yet, even after strong
performance for the stock over the last two years, it trades at only 13 times
this year's earnings and about 11 times next year's earnings estimates. And, the
company has been meeting or beating earnings expectations for some time. So,
here you have a very good business, selling at an attractive price
[SIDENOTE]
"To us, the most important element of risk is the preservation of
capital...the single most important element in achieving that goal is
maintaining a very disciplined implementation of our value philosophy."
ALL STAR EQUITY FUND 13
MANAGER INTERVIEW
--------------------------------------------------------------------------------
with the near-term earnings dynamic looking quite good. It's very much a case of
the three circles coming together: valuation, good fundamentals and a catalyst.
LAMCO: Tell us about a stock that you recently added to the portfolio and why.
DONOVAN: A stock we've added recently is Avon Products, the women's beauty
products company. Avon Products falls into the category of those stocks whose
price has compressed at right around a 20 earnings multiple. As I said earlier,
in an environment in which prices have converged, you want to emphasize high
quality companies, and Avon Products fits that description. This is a company
that has very high returns on invested capital, a global franchise and exciting
growth prospects. In China, a market that Avon Products entered a few years ago,
it is already north of $100 million in annual sales. The stock sold off recently
from the mid to high $50s to around $50 because of fears over the company's
exposure in Latin America. Based on our discussions with management, we thought
those fears were over-blown and, in fact, the company's Latin American business
is trending nicely. We initiated the position in late June at about $50, feeling
the sell-off created a nice entry point.
LAMCO: What about a company that you removed from the portfolio?
DONOVAN: In terms of a sale, El Paso Corporation is a name we sold recently. El
Paso is a company we very much want to continue monitoring because we think
there will be a time when we want to re-establish the position. Getting back to
my point about all the pressures in the system, El Paso would fall into that
category. In this case, the pressure is coming from the credit rating agencies,
which have become a de facto industry regulator for the merchant energy
companies. Due to the Enron debacle, pressure to strengthen balance sheets has
been put on the industry by the rating agencies. In response, El Paso in the
last few months had two different offerings to strengthen its liquidity
position. The loser, in the short run, is the shareholder because there has
clearly been some dilution. That isn't meant to be critical of El Paso
management because the rating agencies are forcing the issue. We just thought it
was prudent to step aside and let these issues get worked out. However, El Paso
is positioned to benefit over the long term and we may re-establish a position
when the situation changes
LAMCO: You're alluding to the very strong fundamentals in the natural gas
industry?
DONOVAN: Yes, the long-term outlook is excellent. Despite soft demand due to a
milder than normal winter in 2001-2002, the demand for natural gas is growing
far faster than the supply. So, the supply-demand fundamentals continue to
provide a positive outlook for El Paso's earnings over the long term.
LAMCO: Mark, thank you very much for an interesting discussion.
ALL STAR EQUITY FUND 14
SCHEDULE OF INVESTMENTS as of June 30, 2002 (Unaudited)
--------------------------------------------------------------------------------
COMMON STOCKS (95.6%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (14.2%)
AUTOMOBILES (0.8%)
Ford Motor Co. 486,400 $ 7,782,400
---------------
AUTO COMPONENTS (0.7%)
Goodyear Tire & Rubber Co. 60,500 1,131,955
Visteon Corp. 446,700 6,343,140
---------------
7,475,095
---------------
HOUSEHOLD DURABLES (0.6%)
Clayton Homes, Inc. 363,800 5,748,040
---------------
HOTELS, RESTAURANTS & LEISURE (2.9%)
Brinker International, Inc. (a) 120,000 3,810,000
Brunswick Corp. 93,400 2,615,200
Carnival Corp. 150,000 4,153,500
International Game Technology (a) 161,800 9,174,060
McDonald's Corp. 140,000 3,983,000
Starwood Hotels & Resorts Worldwide, Inc. 181,600 5,972,824
---------------
29,708,584
---------------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Eastman Kodak Co. 55,000 1,604,350
---------------
MEDIA (2.9%)
AOL Time Warner, Inc. (a) 165,000 2,427,150
Clear Channel Communications, Inc. (a) 140,000 4,482,800
Gannett Co., Inc. 81,900 6,216,210
Liberty Media Corp., Class A (a) 607,700 6,077,000
Pixar, Inc. (a) 122,100 5,384,610
The Reader's Digest Association, Inc. 236,200 4,424,026
---------------
29,011,796
---------------
MULTI-LINE RETAIL (4.5%)
Federated Department Stores, Inc. (a) 117,100 4,648,870
J.C. Penney Co., Inc. 679,400 14,960,388
May Department Stores Co. 100,000 3,293,000
Sears, Roebuck & Co. 157,600 8,557,680
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 15
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MULTI-LINE RETAIL (CONTINUED)
Target Corp. 165,000 $ 6,286,500
Wal-Mart Stores, Inc. 146,600 8,064,466
---------------
45,810,904
---------------
SPECIALTY RETAIL (1.6%)
The Home Depot, Inc. 259,850 9,544,291
Michaels Stores, Inc. 90,000 3,510,000
Toys "R" Us, Inc. (a) 207,700 3,628,519
---------------
16,682,810
---------------
CONSUMER STAPLES (4.0%)
FOOD & DRUG RETAILING (2.4%)
CVS Corp. 125,000 3,825,000
The Kroger Co. (a) 325,000 6,467,500
Tate & Lyle PLC (b) 498,900 10,601,625
Walgreen Co. 95,000 3,669,850
---------------
24,563,975
----------------
FOOD PRODUCTS (0.4%)
Archer Daniels Midland Co. 348,800 4,461,152
---------------
PERSONAL PRODUCTS (0.4%)
Avon Products, Inc. 69,700 3,641,128
---------------
TOBACCO (0.8%)
UST, Inc. 248,700 8,455,800
---------------
ENERGY (4.8%)
ENERGY EQUIPMENT & SERVICES (1.8%)
Nabors Industries, Inc. (a) 216,400 7,638,920
Patterson-UTI Energy, Inc. (a) 73,400 2,072,082
Transocean Sedco Forex, Inc. 279,800 8,715,770
---------------
18,426,772
---------------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 16
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
OIL & GAS (3.0%)
Burlington Resources, Inc. 208,600 $ 7,926,800
ChevronTexaco Corp. 70,000 6,195,000
Marathon Oil Corp. 234,000 6,346,080
Rowan Companies, Inc. (a) 173,200 3,715,140
Tidewater, Inc. 66,000 2,172,720
Valero Energy Corp. 110,300 4,127,426
---------------
30,483,166
---------------
FINANCIALS (24.4%)
BANKS (4.1%)
Bank One Corp. 115,000 4,425,200
Charter One Financial, Inc. 60,000 2,062,800
FleetBoston Financial Corp. 220,000 7,117,000
Golden State Bancorp, Inc. 82,950 3,006,937
Golden West Financial Corp. 84,700 5,825,666
Wachovia Corp. 141,600 5,406,288
Wells Fargo & Co. 282,000 14,116,920
---------------
41,960,811
---------------
DIVERSIFIED FINANCIALS (11.1%)
AmeriCredit Corp. 375,100 10,521,555
The Charles Schwab Corp. 558,850 6,259,120
Citigroup, Inc. 475,300 18,417,875
Countrywide Credit Industries, Inc. 403,600 19,473,700
Freddie Mac 553,100 33,849,720
Goldman Sachs Group, Inc. 157,800 11,574,630
Merrill Lynch & Co., Inc. 90,000 3,645,000
Morgan Stanley 55,000 2,369,400
Stilwell Financial, Inc. 358,800 6,530,160
---------------
112,641,160
---------------
INSURANCE (9.0%)
ACE Ltd. 237,800 7,514,480
AFLAC, Inc. 240,000 7,680,000
The Allstate Corp. 239,000 8,838,220
American Financial Group, Inc. 102,000 2,437,800
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 17
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INSURANCE (CONTINUED)
American International Group, Inc. 271,909 $ 18,552,352
Loews Corp. 37,400 1,981,826
MBIA, Inc. 70,900 4,007,977
The Progressive Corp. 466,700 26,998,595
UnumProvident Corp. 120,000 3,054,000
XL Capital Ltd., Class A 125,000 10,587,500
---------------
91,652,750
----------------
REAL ESTATE (0.2%)
The St. Joe Co. 71,400 2,143,428
---------------
HEALTH CARE (12.2%)
BIOTECHNOLOGY (4.2%)
Amgen, Inc. (a) 282,800 11,843,664
Biogen, Inc. (a) 121,300 5,025,459
Genentech, Inc. (a) 378,600 12,683,100
Genzyme Corp. (a) 138,000 2,655,120
IDEC Pharmaceuticals Corp. (a) 146,000 5,175,700
Invitrogen Corp. (a) 95,000 3,040,950
MedImmune, Inc. (a) 100,000 2,640,000
---------------
43,063,993
---------------
HEALTH CARE EQUIPMENT & SERVICES (2.1%)
Alcon, Inc. (a) 161,700 5,538,225
Applera Corp. - Applied Biosystems Group 65,000 1,266,850
Biomet, Inc. 150,000 4,068,000
Lincare Holdings, Inc. (a) 106,705 3,446,571
Quest Diagnostics, Inc. (a) 75,000 6,453,750
---------------
20,773,396
---------------
HEALTH CARE PROVIDERS & SERVICES (2.2%)
Aetna, Inc. 312,900 15,009,813
HealthSouth Corp.(a) 344,000 4,399,760
Health Management Associates, Inc., Class A (a) 130,000 2,619,500
---------------
22,029,073
---------------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 18
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
PHARMACEUTICALS (3.7%)
Biovail Corp. (a) 114,000 $ 3,301,440
Bristol-Myers Squibb Co. 130,000 3,341,000
Eli Lilly & Co. 65,600 3,699,840
Pfizer, Inc. 132,000 4,620,000
Pharmacia Corp. 304,200 11,392,290
Schering-Plough Corp. 90,000 2,214,000
Sicor, Inc. (a) 170,000 3,151,800
Wyeth 119,400 6,113,280
---------------
37,833,650
---------------
INDUSTRIALS (9.6%)
AEROSPACE & DEFENSE (2.6%)
The Boeing Co. 242,600 10,917,000
General Dynamics Corp. 73,900 7,859,265
L-3 Communications Holdings, Inc. (a) 50,000 2,700,000
Lockheed Martin Corp. 75,000 5,212,500
---------------
26,688,765
---------------
AIR FREIGHT & COURIERS (1.0%)
CP Holders, Inc. 15,000 676,200
Expeditors International Washington, Inc. 116,000 3,846,560
FedEx Corp. 100,000 5,340,000
---------------
9,862,760
---------------
AIRLINES (0.8%)
AMR Corp. (a) 214,600 3,618,156
Southwest Airlines Co. 274,000 4,427,840
---------------
8,045,996
---------------
BUILDING PRODUCTS (0.2%)
York International Corp. 64,700 2,186,213
---------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
Automatic Data Processing, Inc. 85,000 3,701,750
Fiserv, Inc. (a) 55,000 2,019,050
Paychex, Inc. 186,012 5,820,315
---------------
11,541,115
---------------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 19
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INDUSTRIAL CONGLOMERATES (1.5%)
General Electric Co. 125,700 $ 3,651,585
3M Co. 60,000 7,380,000
Tyco International Ltd. 287,400 3,882,774
---------------
14,914,359
---------------
MACHINERY (1.0%)
Caterpillar, Inc. 75,000 3,671,250
Paccar, Inc. 149,050 6,616,330
---------------
10,287,580
---------------
ROAD & RAIL (1.4%)
CSX Corp. 226,200 7,928,310
Swift Transportation Co., Inc. (a) 266,300 6,204,790
---------------
14,133,100
---------------
INFORMATION TECHNOLOGY (19.8%)
COMMUNICATION EQUIPMENT (3.1%)
Brocade Communications Systems, Inc. (a) 142,300 2,487,404
Cisco Systems, Inc. (a) 716,700 9,997,965
Juniper Networks, Inc. (a) 53,600 302,840
Motorola, Inc. 343,700 4,956,154
QUALCOMM, Inc. (a) 229,800 6,317,202
3Com Corp. (a) 1,597,700 7,029,880
---------------
31,091,445
---------------
COMPUTER PERIPHERALS (3.6%)
Dell Computer Corp. (a) 642,200 16,787,108
EMC Corp. (a) 767,500 5,794,625
Network Appliance, Inc. (a) 699,600 8,703,024
Sun Microsystems, Inc. (a) 941,200 4,715,412
---------------
36,000,169
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.3%)
Agilent Technologies, Inc. (a) 405,000 9,578,250
Arrow Electronics, Inc. (a) 110,300 2,288,725
Millipore Corp. (a) 122,000 3,901,560
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 20
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED)
Sanmina-SCI Corp. (a) 764,100 $ 4,821,471
Waters Corp. (a) 85,000 2,269,500
---------------
22,859,506
---------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (6.2%)
Advanced Micro Devices, Inc. 235,200 2,286,144
Analog Devices, Inc. (a) 115,000 3,415,500
Applied Materials, Inc. (a) 690,820 13,139,396
Broadcom Corp., Class A (a) 160,000 2,806,400
Cypress Semiconductor Corp. (a) 118,900 1,804,902
Intel Corp. 442,600 8,086,302
Maxim Integrated Products, Inc. (a) 279,700 10,720,901
Micron Technology, Inc. (a) 254,400 5,143,968
Novellus Systems, Inc. (a) 92,000 3,128,000
Teradyne, Inc. (a) 162,100 3,809,350
Texas Instruments, Inc. 148,100 3,509,970
Xilinx, Inc. (a) 242,700 5,443,761
---------------
63,294,594
---------------
SOFTWARE (4.6%)
Computer Associates International, Inc. 120,000 1,906,800
Microsoft Corp. (a) 446,185 24,406,319
Oracle Corp. (a) 371,700 3,519,999
PeopleSoft, Inc. (a) 170,000 2,529,600
Siebel Systems, Inc. (a) 592,100 8,419,662
Symantec Corp. (a) 100,000 3,285,000
VERITAS Software Corp. (a) 134,000 2,651,860
---------------
46,719,240
---------------
MATERIALS (4.1%)
CHEMICALS (1.3%)
IMC Global, Inc. 458,100 5,726,250
International Flavors & Fragrances, Inc. 62,700 2,037,123
Syngenta AG (a) (b) 463,585 5,637,194
---------------
13,400,567
---------------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 21
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
METALS & MINING (2.3%)
Alcan, Inc. 231,100 $ 8,670,872
Alcoa, Inc. 140,000 4,641,000
CONSOL Energy, Inc. 77,600 1,649,000
Freeport-McMoRan Copper & Gold, Inc., Class B 60,000 1,071,000
Nucor Corp. 103,500 6,731,640
---------------
22,763,512
---------------
PAPER & FOREST PRODUCTS (0.5%)
Bowater, Inc. 19,700 1,071,089
International Paper Co. 86,900 3,787,102
---------------
4,858,191
---------------
TELECOMMUNICATION SERVICES (1.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES (1.5%)
ALLTEL Corp. 85,400 4,013,800
Qwest Communications International, Inc. (a) 1,011,200 2,831,360
Sprint Corp. (FON Group) 340,000 3,607,400
Verizon Communications, Inc. 115,000 4,617,250
WorldCom, Inc.-WorldCom Group (a)(c) 110,000 12,529
---------------
15,082,339
---------------
UTILITIES (1.0%)
ELECTRIC UTILITIES (0.6%)
PG&E Corp. (a) 282,500 5,053,925
Xcel Energy, Inc. 35,500 595,335
---------------
5,649,260
---------------
GAS UTILITIES (0.4%)
El Paso Corp. 185,400 3,821,094
---------------
TOTAL COMMON STOCKS (COST OF $1,064,273,578) 969,154,038
---------------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 22
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
PREFERRED STOCK (0.2%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (0.2%)
MEDIA (0.2%)
The News Corp. Ltd. (b) (Cost $3,804,240) 125,000 $ 2,468,750
---------------
INTEREST MATURITY PAR MARKET
CONVERTIBLE BONDS (0.8%) RATE DATE VALUE VALUE
INDUSTRIALS (0.1%)
METALS & MINING (0.1%)
Freeport-McMoRan
Copper & Gold, Inc. 8.25% 01/31/06 $ 948,000 1,416,284
-----------
INFORMATION TECHNOLOGY (0.6%)
SEMICONDUCTOR EQUIPMENT
& PRODUCTS (0.3%)
Amkor Technology, Inc. 5.75% 06/01/06 5,237,000 2,833,688
-----------
TELECOMMUNICATION
EQUIPMENT (0.3%)
Corning, Inc. 3.50% 11/01/08 3,675,000 2,481,691
-----------
UTILITIES (0.1%)
ELECTRIC UTILITIES (0.1%)
Calpine Capital Corp. 5.75% 11/01/04 32,600 1,055,425
-----------
TOTAL CONVERTIBLE BONDS (COST OF $10,141,514) 7,787,088
-----------
See Notes to Schedule of Investments.
ALL STAR EQUITY FUND 23
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------
PAR MARKET
SHORT-TERM INVESTMENT (4.5%) VALUE VALUE
REPURCHASE AGREEMENT (4.5%)
Repurchase Agreement with SBC Warburg Ltd., dated 06/28/02,
at 1.90% to be repurchased at $45,182,153 on 07/01/02,
collateralized by U.S. Treasury bonds and/or notes with various
maturities to 2027, with a current market value of $46,235,191.
(Cost of $45,175,000) $45,175,000 $45,175,000
-------------
TOTAL INVESTMENTS (101.1%) (COST OF $1,123,394,332) (d) 1,024,584,876
OTHER ASSETS AND LIABILITIES, NET (-1.1%) (11,284,690)
-------------
NET ASSETS (100.0%) $1,013,300,186
=============
NET ASSET VALUE PER SHARE (119,374,676 SHARES OUTSTANDING) $8.49
=============
Notes To Schedule Of Investments
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) As of June 30, 2002, the Fund held shares of WorldCom, Inc.-WorldCom Group,
representing less than 0.00% of net assets. WorldCom, Inc.-WorldCom Group
filed for bankruptcy protection under Chapter 11 on July 21, 2002.
(d) Cost of investments for both financial statement and federal income tax
purposes is the same.
Gross unrealized appreciation and depreciation
of investments at June 30, 2002 is as follows:
Gross unrealized appreciation $141,603,944
Gross unrealized depreciation (240,413,400)
------------
Net unrealized depreciation $(98,809,456)
============
See Notes to Financial Statements.
ALL STAR EQUITY FUND 24
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2002 (UNAUDITED)
ASSETS:
Investments at market value (identified cost $1,123,394,332) $1,024,584,876
Cash 2,384
Receivable for investments sold 5,953,535
Dividends and interest receivable 533,349
Other assets 168,410
--------------
TOTAL ASSETS 1,031,242,554
--------------
LIABILITIES:
Payable for investments purchased 4,459,335
Distributions payable to shareholders 12,602,027
Management, administrative and bookkeeping/pricing fees payable 773,334
Accrued expenses 107,672
--------------
TOTAL LIABILITIES 17,942,368
--------------
NET ASSETS $1,013,300,186
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized; 119,374,676 shares outstanding) $1,153,595,990
Overdistributed net investment income (54,845,605)
Accumulated net realized gain on investments
less distributions 13,359,257
Net unrealized depreciation on investments (98,809,456)
--------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($8.49 PER SHARE) $1,013,300,186
==============
See Notes to Financial Statements.
ALL STAR EQUITY FUND 25
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
INVESTMENT INCOME:
Dividends $ 5,044,200
Interest 461,193
--------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $19,459) 5,505,393
EXPENSES:
Management fee $ 3,953,731
Administrative fee 985,847
Bookkeeping and pricing fees 96,733
Custodian and transfer agent fees 121,586
Shareholder communication expenses 218,718
Trustees' fees and expenses 49,645
NYSE fee 39,759
Miscellaneous expense 55,596
------------
TOTAL EXPENSES 5,521,615
--------------
CUSTODY EARNINGS CREDIT (46)
--------------
NET EXPENSES 5,521,569
--------------
Net Investment LOSS (16,176)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 549,592,276
Cost of investments sold 533,886,901
------------
Net realized gain on investment transactions 15,705,375
Net unrealized appreciation/depreciation on investments:
Beginning of period 98,462,182
End of period (98,809,456)
------------
Change in unrealized appreciation/depreciation-net (197,271,638)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (181,582,439)
==============
See Notes to Financial Statements.
ALL STAR EQUITY FUND 26
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 2002 DECEMBER 31,
(UNAUDITED) 2001
Operations:
Net investment income (loss) $ (16,176) $ 3,150,145
Net realized gain on investment transactions 15,705,375 26,065,683
Change in unrealized appreciation/depreciation - net (197,271,638) (205,304,643)
--------------- ----------------
Net decrease in net assets
resulting from operations (181,582,439) (176,088,815)
--------------- ----------------
Distributions declared from:
Net investment income (54,829,429) (3,150,145)
Net realized gain on investments -- (119,953,062)
--------------- ----------------
Total distributions (54,829,429) (123,103,207)
--------------- ----------------
Capital transactions:
Proceeds from rights offering 96,089,669 --
Dividend reinvestments 20,458,706 56,182,988
--------------- ----------------
Increase in net assets from capital share transactions 116,548,375 56,182,988
--------------- ----------------
Total decrease in net assets (119,863,493) (243,009,034)
Net assets:
Beginning of period 1,133,163,679 1,376,172,713
--------------- ----------------
End of period $1,013,300,186 $1,133,163,679
=============== ================
See Notes to Financial Statements.
ALL STAR EQUITY FUND 27
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 2002 YEAR ENDED DECEMBER 31,
(UNAUDITED) -----------------------------------------
2001 2000 1999
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 10.65 $ 13.61 $ 14.02 $ 14.22
------------ ----------- ---------- -----------
Income from Investment Operations:
Net investment income 0.00(a) 0.03 0.05 0.05
Net realized and unrealized gain
(loss) on investments (1.59) (1.79) 0.96 1.22
Provision for federal income tax -- -- -- --
------------ ----------- ---------- -----------
Total from Investment Operations (1.59) (1.76) 1.01 1.27
------------ ----------- ---------- -----------
Less Distributions from:
Net investment income (0.49) (0.03) (0.06) (0.05)
Realized capital gain -- (1.17) (1.36) (1.34)
Return of capital -- -- -- --
------------ ----------- ---------- -----------
Total Distributions (0.49) (1.20) (1.42) (1.39)
------------ ----------- ---------- -----------
Change due to rights offering (c) (0.08) -- -- --
Impact of shares issued in dividend
reinvestment (d) -- -- -- (0.08)
------------ ----------- ---------- -----------
Total Distributions, Reinvestments
and Rights Offering (0.57) (1.20) (1.42) (1.47)
------------ ----------- ---------- -----------
Net asset value at end of period $ 8.49 $ 10.65 $ 13.61 $ 14.02
============ =========== ========== ===========
Market price at end of period $ 8.58 $ 11.09 $ 12.375 $ 11.063
============ =========== ========== ===========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (e)
Based on net asset value (15.5%)(f) (12.7)% 8.8% 10.2%
Based on market price (18.0%)(f) 0.0% 25.4% (4.4)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,013 $ 1,333 $ 1,376 $ 1,396
Ratio of expenses to average net assets 1.02%(g) 1.03% 0.96% 0.97%
Ratio of net investment income to
average net assets 0.00%(h) 0.27% 0.37% 0.37%
Portfolio turnover rate 52%(f) 64% 83% 90%
(a) Rounds to less than $(0.01).
(b) Before provision for federal income tax.
(c) Effect of All-Star's rights offerings for shares at a price below net asset
value.
(d) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
See Notes to Financial Statements.
ALL STAR EQUITY FUND 28
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $13.32 $11.95 $11.03 $9.26 $10.40 $10.78 $11.20
------ ------ ------ ----- ------ ------ ------
Income from Investment Operations:
Net investment income 0.05 0.05 0.08 0.10 0.11 0.12 0.16
Net realized and unrealized gain
(loss) on investments 2.35 3.01(b) 2.15(b) 2.71 (0.20) 0.78(b) 0.54
Provision for federal income tax -- (0.36) (0.13) -- -- (0.18) --
------ ------ ------ ----- ------ ------ ------
Total from Investment Operations 2.40 2.70 2.10 2.81 (0.09) 0.72 0.70
------ ------ ------ ----- ------ ------ ------
Less Distributions from:
Net investment income (0.05) (0.05) (0.08) (0.10) (0.12) (0.12) (0.18)
Realized capital gain (1.35) (1.28) (1.10) (0.94) (0.52) (0.58) (0.66)
Return of capital -- -- -- -- (0.36) (0.37) (0.23)
------ ------ ------ ----- ------ ------ ------
Total Distributions (1.40) (1.33) (1.18) (1.04) (1.00) (1.07) (1.07)
------ ------ ------ ----- ------ ------ ------
Change due to rights offering (c) (0.10) -- -- -- (0.05) (0.03) (0.05)
Impact of shares issued in dividend
reinvestment (d) -- -- -- -- -- -- --
------ ------ ------ ----- ------ ------ ------
Total Distributions, Reinvestments
and Rights Offering (1.50) (1.33) (1.18) (1.04) 1.05 (1.10) (1.12)
------ ------ ------ ----- ------ ------ ------
Net asset value at end of period $14.22 $13.32 $11.95 $11.03 $9.26 $10.40 $10.78
====== ====== ====== ====== ====== ====== ======
Market price at end of period $12.938 $13.313 $11.250 $10.875 $8.500 $11.125 $11.125
====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (e)
Based on net asset value 19.8% 26.6% 21.7% 31.8% (0.8%) 8.8% 6.9%
Based on market price 9.1% 34.4% 16.2% 41.4% (14.9%) 12.7% 14.9%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $1,351 $1,150 $988 $872 $710 $725 $665
Ratio of expenses to average net assets 1.00% 1.01% 1.03% 1.06% 1.07% 1.08% 1.08%
Ratio of net investment income to
average net assets 0.39% 0.38% 0.73% 0.92% 1.16% 1.08% 1.44%
Portfolio turnover rate 76% 99% 70% 54% 44% 72% 57%
(e) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(f) Not annualized.
(g) Annualized.
(h) Amount represents less than 0.01%.
See Notes to Financial Statements.
ALL STAR EQUITY FUND 29
NOTES TO FINANCIAL STATEMENTS June 30, 2002 (Unaudited)
--------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Equity Fund ("All-Star" or the "Fund"), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. All-Star's investment goal 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 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 could differ
from these estimates.
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. Debt securities generally are valued by a pricing
service based on market transactions for normal, institutional-size trading
units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used. 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 Board of
Trustees ("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 Trustees determines that this does not
represent fair value.
PROVISION FOR FEDERAL INCOME TAX - Consistent with the Fund's policy to qualify
as a regulated investment company and to distribute all of its taxable income to
shareholders, no federal income tax has been accrued.
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
ALL STAR EQUITY FUND 30
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
$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.The Manager is
responsible for providing pricing and bookkeeping services to the Fund under a
Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing
Agreement"), the Manager has delegated those functions to State Street Bank and
Trust Company ("State Street"). The Manager pays fees to State Street under the
Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, the Manager
receives from the Fund an annual flat fee or $10,000, paid monthly, and in any
month that the Fund's average weekly net assets are more than $50 million, a
monthly fee equal to the average weekly net assets of the Fund for that month
multiplied by a fee rate that is calculated by taking into account the fees
payable to State Street under the Outsourcing Agreement.
OTHER - The Fund has an agreement with its custodian bank under which $46 of
custody fees were reduced by balance credits for the six months ended June 30,
2002. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing asset if
it had not entered into such agreements.
NOTE 3. CAPITAL TRANSACTIONS
In a rights offering commencing April 5, 2002, shareholders exercised rights to
purchase 10,688,506 shares at $8.99 per share for proceeds, net of expenses, of
$96,089,669. During the period ended June 30, 2002, and the year ended December
31, 2001, distributions in the amount of $20,458,706 and $56,182,988
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
2,239,080 and 5,333,568 shares, respectively.
NOTE 4. SECURITIES TRANSACTIONS
Realized gains and losses are recorded on the identified cost basis for both
financial reporting and federal income tax purposes. The cost of investments
purchased and the proceeds from investments sold excluding short-term debt
obligations for the six months ended June 30, 2002 were $620,339,651 and
$549,592,276, 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 carry-forwards)
under income tax regulations. These reclassifications are excluded from the per
share amount in the Financial Highlights.
ALL STAR EQUITY FUND 31
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
--------------------------------------------------------------------------------
On April 30, 2002, the Annual Meeting of Shareholders of the Fund was held to
elect one (1) Trustee; to approve the Fund's Portfolio Management Agreements;
and to ratify the selection of PricewaterhouseCoopers LLP as independent
accountants for the fiscal year ending December 31, 2002. On February 1, 2002,
the record date for the Meeting, the Fund had outstanding 106,447,090 shares of
beneficial interest. The votes cast at the Meeting were as follows:
1. Proposal to elect (1) Trustee:
James E. Grinnell
FOR 99,992,782.355
AGAINST 1,496,519.060
2. Proposal to approve the Fund's Portfolio
Management Agreement with TCW
Investment Management Company:
FOR 98,694,854.081
AGAINST 1,137,684.163
ABSTAIN 1,656,763.171
3. Proposal to approve the Fund's Portfolio
Management Agreement with Schneider
Capital Management Corporation:
FOR 98,714,898.492
AGAINST 1,070,707.215
ABSTAIN 1,703,695.708
4. Proposal to ratify the selection of PricewaterhouseCoopers LLP
as independent accountants:
FOR 99,645,531.388
AGAINST 707,408.602
ABSTAIN 1,136,361.425
DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------
Through the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan, the
Fund's shareholders have the opportunity to have their dividends automatically
reinvested in additional shares of the Fund. Participating shareholders have
been rewarded as a result of the consistent reinvestment of dividends. Each
share of the Fund owned by shareholders who have participated in the Dividend
Reinvestment Program since the Fund began operations in 1986 would have grown to
5.524 shares as of June 30, 2002, with a total net asset value of $46.90.
Participants are kept apprised of the status of their account through quarterly
statements.
For complete information and enrollment forms, please call Investor
Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern Time. If your shares are held for you by a broker, bank or
other nominee, you should contact the institution holding your shares if you
wish to participate in the Plan.
ALL STAR EQUITY FUND 32
[ALL-STAR(SM) EQUITY FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
160 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43011, Providence, Rhode Island 02940-3011
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
TRUSTEES
Robert J. Birnbaum*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
J. Kevin Connaughton, Treasurer
Jean S. Loewenberg, Secretary
* Member of the audit committee.
[LOGO] USA
LISTED
NYSE
[ALL-STAR(SM) EQUITY FUND LOGO]
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
[LOGO] USA [LOGO] A MEMBER OF THE
LISTED CLOSED-END
NYSE FUND
ASSOCIATION, INC.
WWW.CLOSED-ENDFUNDS.COM