ASG Liberty All Star Growth Fund

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Performance returns for the Fund are calculated assuming all distributions are reinvested at actual reinvestment prices and all primary rights in the Fund’s rights offering were exercised. Returns are net of management fees and other Fund expenses.

The returns shown for the Lipper Multi-Cap Growth Mutual Fund Average are based on open-end mutual funds’ total returns, which include dividends, and are net of fund expenses. Returns for the unmanaged Dow Jones Industrial Average, NASDAQ Composite Index, the Russell Growth Benchmark and the S&P 500^® Index are total returns, including dividends. A description of the Lipper benchmark and the market indices can be found on page 55.

Past performance cannot predict future results. Performance will fluctuate with market conditions. Current performance may be lower or higher than the performance data shown. Performance information does not reflect the deduction of taxes that shareholders would pay on Fund distributions or the sale of Fund shares. An investment in the Fund involves risk, including loss of principal.

Closed-end funds raise money in an initial public offering and shares are listed and traded on an exchange. Open-end mutual funds continuously issue and redeem shares at net asset value. Shares of closed-end funds frequently trade at a discount to net asset value. The price of the Fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.

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UNIQUE ATTRIBUTES OF Liberty All-Star^® Growth Fund

 

Several attributes help to make the Fund a core equity holding for investors seeking a diversified growth portfolio, income and the potential for long-term appreciation.

 

	MULTI-MANAGEMENT FOR INDIVIDUAL INVESTORS
	Large institutional investors have traditionally employed multiple investment managers. With three investment managers investing across the full capitalization range of growth stocks, the Fund brings multi-management to individual investors.

 

	REAL-TIME TRADING AND LIQUIDITY
	The Fund has a fixed number of shares that trade on the New York Stock Exchange and other exchanges. Share pricing is continuous—not just end-of-day, as it is with open-end mutual funds. Fund shares offer immediate liquidity, there are no annual sales fees and can often be traded commission free.

Liberty All-Star® Growth Fund

Unique Fund Attributes

 

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	ACCESS TO INSTITUTIONAL MANAGERS
	The Fund’s investment managers invest primarily for pension funds, endowments, foundations and other institutions. Because institutional managers are closely monitored by their clients, they tend to be more disciplined and consistent in their investment process.

 

	MONITORING AND REBALANCING
	ALPS Advisors continuously monitors these investment managers to ensure that they are performing as expected and adhering to their style and strategy, and will replace the managers when warranted. Periodic rebalancing maintains the Fund’s structural integrity and is a well-recognized investment discipline.

 

	ALIGNMENT AND OBJECTIVITY
	Alignment with shareholders’ best interests and objective decision-making help to ensure that the Fund is managed openly and equitably. In addition, the Fund is governed by a Board of Directors that is elected by and responsible to shareholders.

 

	DISTRIBUTION POLICY
	Since 1997, the Fund has followed a policy of paying annual distributions on its shares at a rate that approximates historical equity market returns. The current annual distribution rate is 8 percent of the Fund’s net asset value (paid quarterly at 2 percent per quarter), providing a systematic mechanism for distributing funds to shareholders.

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GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

The graph below illustrates the growth of a hypothetical $10,000 investment assuming the purchase of shares of common stock at the closing market price (NYSE: ASG) of $9.25 on December 31, 1996, and tracking its progress through December 31, 2019. For certain information, it also assumes that a shareholder exercised all primary rights in the Fund’s rights offerings (see below). This graph covers the period since the Fund commenced its distribution policy in 1997.

The growth of the investment assuming all distributions were received in cash and not reinvested back into the Fund. The value of the investment under this scenario grew to $22,541 (including the December 31, 2019 value of the original investment of $7,027, plus distributions during the period of $15,514).

The additional value realized through reinvestment of all distributions. The value of the investment under this scenario grew to $63,779.

The additional value realized by exercising all primary rights in the Fund’s rights offerings. The value of the investment under this scenario grew to $93,786 excluding the cost to exercise all primary rights in the rights offerings which was $25,131.

Past performance cannot predict future results. Performance will fluctuate with changes in market conditions. Current performance may be lower or higher than the performance data shown. Performance information does not reflect the deduction of taxes that shareholders would pay on Fund distributions or the sale of Fund shares. An investment in the Fund involves risk, including loss of principal.

DISTRIBUTION POLICY

The current policy is to pay distributions on its shares totaling approximately 8 percent of its net asset value per year, payable in four quarterly installments of 2 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. Sources of distributions to shareholders may include ordinary dividends, long-term capital gains and return of capital. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during its fiscal year and may be subject to changes based on tax regulations. If a distribution includes anything other than net investment income, the Fund provides a Section 19(a) notice of the best estimate of its distribution sources at that time. These estimates may not match the final tax characterization (for the full year’s distributions) contained in shareholder 1099-DIV forms after the end of the year. If the Fund’s ordinary dividends and long-term capital gains for any year exceed the amount distributed under the distribution policy, the Fund may, in its discretion, retain and not distribute capital gains and pay income tax thereon to the extent of such excess.

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THE FUND’S THREE GROWTH INVESTMENT MANAGERS
AND THE MARKET CAPITALIZATION ON WHICH EACH FOCUSES:

ALPS Advisors, Inc., the investment advisor to the Fund, has the ultimate authority (subject to oversight by the Board of Directors) to oversee the investment managers and recommend their hiring, termination and replacement.

MANAGERS’ DIFFERING INVESTMENT STRATEGIES 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 the Fund’s multi-managed portfolio. The characteristics are different for each of the Fund’s three investment managers. These differences are a reflection of the fact that each has a different capitalization focus and investment strategy. The shaded column highlights the characteristics of the Fund as a whole, while the first three columns show portfolio characteristics for the Russell Smallcap, Midcap and Largecap Growth indices. See page 55 for a description of these indices.

				MARKET CAPITALIZATION SPECTRUM
PORTFOLIO CHARACTERISTICS				SMALL		LARGE
AS OF DECEMBER 31, 2019
	RUSSELL GROWTH:
	Smallcap Index	Midcap Index	Largecap Index	Weatherbie	Congress	Sustainable	Total Fund
Number of Holdings	1,172	403	530	50	40	30	120
Percent of Holdings in Top 10	5%	12%	37%	50%	29%	43%	17%
Weighted Average Market Capitalization (billions)	$2.8	$20.3	$394.6	$4.7	$13.0	$240.1	$86.5
Average Five-Year Earnings Per Share Growth	14%	15%	16%	24%	16%	16%	17%
Average Five-Year Sales Per Share Growth	9%	12%	13%	17%	11%	11%	12%
Price/Earnings Ratio*	27x	29x	29x	52x	31x	35x	36x

* Excludes negative earnings.

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MANAGER ROUNDTABLE

An exceptional year created an attractive environment for growth style investors but keeping pace demanded a proven investment process and rigorous company analysis—as well as a watchful eye to the future.

Liberty All-Star Growth Fund’s three investment managers have long experience, in-depth knowledge, a proven track record and a firm commitment to growth style investing. Once again, we are grateful to be able to call upon this resource to provide Fund shareholders with timely commentary and insight. The Fund’s Investment Advisor, ALPS Advisors, serves as moderator of the roundtable. Participating investment management firms, the portfolio manager for each and their respective capitalization ranges are:

CONGRESS ASSET MANAGEMENT COMPANY, LLP

Portfolio Manager/Todd Solomon, CFA

Senior Vice President/Portfolio Manager

Capitalization Focus/Mid-Cap Growth—Congress Asset Management’s mid-cap growth strategy focuses on established, high-quality companies that are growing earnings and generating attractive levels of free cash flow. The firm also strives to construct portfolios with relatively low levels of volatility.

SUSTAINABLE GROWTH ADVISERS, LP

Portfolio Manager/Kishore D. Rao

Principal and Portfolio Manager

Capitalization Focus/Large-Cap Growth—Sustainable Growth Advisers (SGA) focuses on companies that have unique characteristics that lead to a high degree of predictability, strong profitability and above-average earnings and cash flow growth over the long term.

WEATHERBIE CAPITAL, LLC

Portfolio Manager/Matthew A. Weatherbie, CFA

President and Founder

Capitalization Focus/Small-Cap Growth—Weatherbie practices a small capitalization growth investment style focusing on high quality companies that demonstrate superior earnings growth prospects, yet are reasonably priced relative to their intrinsic value. The firm seeks to provide superior returns relative to small capitalization growth indices over a full market cycle.

Growth outperformed value once again in 2019, but results for growth companies have varied across the capitalization spectrum with mid-cap growth and large-cap growth outperforming small-cap growth. Reflecting the capitalization range that is your particular focus for the Liberty All-Star Growth Fund, what’s the case for large-, mid- and small-cap growth stocks in the current and foreseeable investment environment? Let’s start with the Fund’s mid-cap growth manager.

“Mid-sized companies often combine some of the best attributes of larger and smaller companies.”

—Todd Solomon

(Congress – Mid-Cap Growth)

Solomon (Congress – Mid-Cap Growth): Mid-sized companies often combine some of the best attributes of larger and smaller companies. They have progressed enough to establish a proven business model and economies of scale but remain nimble enough to pivot in reaction to changing business conditions. In comparison to small caps, they generally have greater management experience, better trading liquidity and superior asset capacity. Also, mid-cap stocks have exhibited higher long-term revenue and earnings per share growth than both large- and small-cap stocks over the past 20 years, which is the longest time period for which common data is available for all three. Recently published data by Jeffries shows expectations for 2020 are for continued faster earnings growth from mid- than large- and small-cap stocks.

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Thanks, Todd. Kishore, what’s the perspective from the large-cap growth point of view?

“We see attractive opportunities in the health care, consumer staples, information technology and consumer discretionary sectors.”

—Kishore Rao

(Sustainable – Large-Cap Growth)

Rao (Sustainable – Large-Cap Growth): In our analysis of companies, we consider businesses where their liquidity is sufficient for us to be able to build large positions in the stock consistent with our focus on constructing highly concentrated portfolios. Most businesses that make it on to our Qualified Company List—our highly selective buy list of businesses that have been fully vetted by our analyst team and determined to possess the key business quality and long-term sustainable growth we seek—fall into the large- and mid-cap, earlier lifecycle tiers. The proportion between them varies considerably depending on the valuations of the respective revenue and earnings growth streams. We see attractive opportunities in several areas ranging from the health care and consumer staples sectors to the information technology, consumer discretionary and communication services sectors. The highly bifurcated nature of the growth stock advance over the past few years has created myriad opportunities across capitalization tiers.

Thanks. What about small-caps, Matt?

Weatherbie (Weatherbie – Small-Cap Growth): Weatherbie Capital focuses particularly on smaller-cap growth stocks, and we believe a strong case can be made that this range of the spectrum may outperform others in the foreseeable future. Capital markets research from our parent, Alger, suggests that smaller capitalization stocks may be poised to outperform based on three factors. First, stronger fundamentals: small companies are expected to grow faster than large ones. Second, compelling valuations: the average small cap price/earnings multiple premium is low relative to history, based on data from FactSet. Third, less exposure to international economies: U.S. small caps are more linked to our domestic economy. Benefits to this include recognizing revenue in U.S. dollar terms—the dollar remains historically strong relative to non-U.S. currencies. While our portfolio companies do not typically have significant debt on their balance sheets, those with debt to service may benefit from historically low interest rates. Finally, Weatherbie portfolio companies with energy as a significant raw input to their business model are enjoying some of the lowest energy prices, on an inflation-adjusted basis, of the last half-century.

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What types of companies and/or industries do you expect to offer particularly compelling investment opportunities over the next 12 to 24 months or longer? Include specific company names or industries, if appropriate, to make the point. Matt, let’s stay with you.

“We mine for ‘hidden gems’ potentially offering steadier growth rates, more predictable cash flows and significant competitive advantages.”

—Matt Weatherbie

(Weatherbie – Small-Cap Growth)

Weatherbie (Weatherbie – Small-Cap Growth): The share of the Liberty All-Star Growth Fund that we manage is a diversified portfolio of smaller-capitalization U.S. stocks including several companies in mundane industries. It is a category we will continue to mine for “hidden gems” potentially offering steadier growth rates, more predictable cash flows and significant competitive advantages. Two examples among Weatherbie’s current top 10 positions are Chegg, Inc. (CHGG) and Casella Waste Systems, Inc. (CWST).

Chegg is a leader in providing learning solutions and services to high school and college students. Originally focused on textbook rentals, it has recently completely revamped its business model to provide services in high-growth areas such as study assistance, tutoring and writing tools. This is proving to be a successful strategy and could result in significant top-line growth and improved profitability. Currently Chegg has low double-digit penetration in the U.S. four-year college market, estimated at more than 20 million students.

Casella Waste Systems is a well-managed, smaller-capitalization waste processing company in the Northeast benefiting from significant free cash flow generation, favorable industry dynamics and revenue growth potential ahead of its peers. While Weatherbie Capital sees no signs of recession in the immediate future, with contracts placed among cities, municipalities and other public sector entities, Casella is positioned to hold up well in a slowing economy.

At the opposite end of the capitalization spectrum, share your thoughts, please, Kishore.

Rao (Sustainable – Large-Cap Growth): We do not focus on evaluating sectors or industries other than in the normal course of understanding the ecosystems our companies operate within. Rather, our focus is on individual businesses where we seek quality companies with superior pricing power, recurring revenues, long runways of growth, strong cash flow generation and financial characteristics, and a management team whose interests are well aligned with shareholders. We see attractive opportunities in several areas that I previously mentioned—the health care, consumer staples, information technology, consumer discretionary and communication services sectors. Likewise, there are areas of the market that fail to meet our business quality and growth criteria. Generally, you will not see our portfolios heavily invested in the more cyclical industrials, energy or materials sectors due to our preference for more predictable and recurring revenue streams. Likewise, we tend not to invest in utilities or real estate, which normally fail to offer the above-average growth or business quality that we seek.

Todd, will you round it out with the viewpoint of a mid-cap growth manager?

Solomon (Congress – Mid-Cap Growth): Although we are a growth investor, we do not limit ourselves to the fastest growing stocks or industries. We consider growth in revenue or earnings as any number greater than zero. Quality, consistent, conservative growth investments can be found in many areas of the market and are easy to overlook if seeking only the highest levels of growth. Such investments are the best way to diversify a portfolio and attempt to minimize volatility. In 2020, we may find such investments in the consumer discretionary, industrial and technology hardware areas. These have likely passed the worst of the effects of tariffs, will benefit from steady global growth and have attractive valuations.

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On the other hand, are there companies/industries that have been growth stock leaders but that now, for various reasons, warrant a greater degree of caution? As needed, cite specific company names and/or industries to make the point. Let’s cover the capitalization range small to large.

Weatherbie (Weatherbie – Small-Cap Growth): Baby Boomers continue to be a force in U.S. consumption, but since the needs of that cohort continually change, certain companies and industries become less relevant. We believe a perfect example is the RV modification business. Since the year 2000 those Boomers have been reaching retirement age in the U.S. Many “empty nesters” have opted for RV ownership over other forms of retirement travel or, indeed, as an alternative to conventional home ownership. As RV sales were strong across the 2010–2017 time period, we captured this trend in our portfolio.

More recently, RV demand has slowed down, manufacturers’ inventories have piled up and dealers selling new RVs have suffered from the slowdown in sales. With the RV market down from its 2018 peak, another set of companies that warrants a greater degree of caution are those providing upgrades and modifications to used RVs. With new RV prices lower, consumers are less likely to buy used RVs and invest in upgrades. This is just one example of how Boomer buying patterns will continue to evolve and affect companies’ performance.

Solomon (Congress – Mid-Cap Growth): The two areas of caution for us are consumer staples and technology software. In both instances, we believe there are concerns regarding valuations and expected growth rates. Consumer staples has been a solid area of returns for our portfolio and a successful way to keep volatility in check. At current valuations, however, we feel there may be better opportunities elsewhere in our universe. In the same vein, technology software has seen great growth in revenue, earnings and valuations. The high valuations may lead to volatility if companies can’t repeat the hypergrowth experienced over the past several years.

Rao (Sustainable – Large-Cap Growth): Apple (AAPL) is a company that retains a significant weight in the Russell 1000® Growth Index and has been a stellar performer over the past year. We continue to think highly of Apple as a quality business, but do not see that it has the earnings growth opportunity that it once did, and have therefore not owned the stock since April of 2017 due to our concerns about its slowing earnings growth trajectory. We have owned several of the information technology and e-commerce businesses that have led the market in recent years, taking our weight in them down, or exiting the positions when valuations seemed stretched, and adding to them or reinitiating positions when they appeared more attractively valued. As an example, Facebook (FB) exited the portfolio and is now back in. Amazon’s (AMZN) weight was consistently reduced due to valuation in recent years but has now become a larger weight as its valuation has become more attractive.

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With very few exceptions—other than the U.S-China tariff dispute and Brexit, although both look somewhat less daunting after recent events—perceptions of risk seem to have diminished and investor sentiment has become much more positive as the rally that paused in August continued into year-end 2019. What risks do you see on the horizon that concern you or, at the least, warrant closer monitoring? Kishore, let’s stay with you.

Rao (Sustainable – Large-Cap Growth): While investors have increased their risk tolerance due to the trade accord, better than expected global economic data and willingness by monetary authorities to maintain accommodative policies longer, we remain cautious. Market profit expectations declined in 2019 due to these fears. It’s likely that expectations overshot on the negative side and now some recalibration, which benefits cyclical businesses that are most levered to economic growth, is taking place. In the short term this could pose a headwind for our focus on more predictable growth. Beyond this, we remain wary of trade policy and rhetoric. The implications of the first U.S.-China agreement are still uncertain and difficult negotiations remain. Recent U.K. elections paved the way for Brexit, but how that affects European consumer and business sentiment remains uncertain. Flaring Middle East tensions and the impact on oil prices create significant uncertainty for consumer confidence and global growth. Finally, 2020 election results will affect U.S. economic growth over coming years due to major differences between the parties concerning tax and regulatory policies.

Todd, what are your thoughts?

Solomon (Congress – Mid-Cap Growth): In no particular order, our global/international concerns include: political upheaval, an example being the Hong Kong protests; Russia-Belarus tensions; the potential for conflict in the South China Sea; the U.S. relationship with North Korea; data security; and cybercurrencies. Focusing on the U.S., we would include the possibility of a recession; consumer psychology during an election year; impeachment; Federal Reserve Bank interventions and policies; bull market fatigue; and labor market tightness.

Matt, kindly wrap it up for us, please.

Weatherbie (Weatherbie – Small-Cap Growth): The U.S.-China tariff dispute and Brexit do seem to be waning as concerns, but the Middle East remains volatile. At this point we do not see events there unduly roiling the U.S. stock market. At Weatherbie Capital, the investment teams are monitoring concerns as diverse as changes in immigration rates, IPO/startup rates, labor force education levels and climate change indicators. Two specific areas being monitored are U.S. exports and changes in the fed funds rate.

Earlier we mentioned the strong U.S. dollar, low U.S. interest rates and beneficial low energy costs. The relative weaknesses on these fronts outside the U.S.—combined with significant ongoing trade issues—are weighing on U.S. exports, threatening to drag down overall U.S. growth. Add to this the fact that in China, Japan and Europe industrial production is slowing. U.S. export orders, which were growing one year ago, are now declining.

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Another factor that Alger capital market analysts are watching closely is the fed funds rate—the rate at which banks with balances held at the Federal Reserve borrow from one another on an overnight basis. Looking back to periods preceding the past three recessions—the 1989–1992, 2001–2003 and 2007–2008 downturns—this rate was much higher. In fact, it was more than double its present levels, giving the Fed more room to respond by stimulating growth through cuts. When the next recession eventually comes, will the Federal Reserve have enough “ammunition” to stimulate the economy? As Japan and Europe have made all too clear, it is difficult to stimulate economies with real interest rates close to zero.

Many thanks for sharing your thinking. Certainly, a rewarding 2019. Lots of variables await in 2020, so we already look forward to our next conversation.

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.

See Notes to Financial Statements.