USA Liberty All Star Equity Fund

Item 1. Report of Shareholders.

Contents

A SINGLE INVESTMENT...

A DIVERSIFIED CORE PORTFOLIO

A single fund that offers:

LIBERTY ALL-STAR^® EQUITY FUND

Beginning on January 1, 2021, as permitted by regulations adopted by the U.S. Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Fund’s website at www.all-starfunds.com, and you will be notified each time a report is posted and provided with a website link to access the report.

You may elect to receive all future shareholder reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Fund and your shares are held with the Fund’s transfer agent, Computershare, you can call 1-800-542-3863 to let the Fund know you wish to continue receiving paper copies of your shareholder reports.

If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically anytime by contacting your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor you may log into your Investor Center account at www.computershare.com/investor and go to “Communication Preferences”.

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In a historic about-face, key market indices soared during the second quarter:

The reversal propelled the NASDAQ Composite to a gain of 12.67 percent for the first half of 2020, but was not quite enough to move the other two indices into positive territory, as the S&P 500® gave up 3.08 percent while the DJIA declined 8.43 percent.

Such an outcome could hardly have been anticipated on April 1, as stocks suffered the worst losses ever recorded for the first trading day of a new quarter—more than 4 percent for all three indices. A day later, it was reported that jobless claims leapt a record 6.6 million at the end of March and over the next two weeks the total would rise to 16 million jobless and an unemployment rate in excess of 10 percent (unemployment would later rise to 14.7 percent, a post-World War II high). The University of Michigan’s consumer sentiment survey showed its largest-ever one-month decline, retail sales in the U.S. plummeted a record 8.7 percent and the lack of demand sent the consumer price index down 7.6 percent, the biggest drop since 1980. The Commerce Department announced that GDP fell at a 4.8 percent annual rate in the first three months of the year, the first quarterly drop since 2014. Federal Reserve Chair Jerome Powell forecast, “We are going to see economic data for the second quarter that is worse than any data we have seen for the economy.”

Then, even more suddenly than the pandemic devastated financial markets, a complete reversal took hold. In the first full week of April the three key indices previously cited all posted returns in the 10 percent range, the best weekly returns since 1974. Federal programs proved to be the catalyst in the turnaround. The Federal Reserve engineered a broad array of actions to limit the economic damage from the pandemic, including up to $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. These included the Paycheck Protection Program and Main Street Lending Program as well as loans to households and small businesses and direct loans to municipal governments. The Fed also cut its target for the fed funds rate—the rate banks pay to borrow from each other overnight—by a total of 1.5 percentage points beginning March 3, lowering it to a range of 0 percent to 0.25 percent. The momentum continued to build as states began to implement various plans for reopening their economies after a virtual shut-down brought businesses, especially retail, hospitality and services, to a near halt.

The S&P 500^® logged a 12.8 percent return for April; followed by a 4.8 percent advance in May, which marked the best two-month period in 11 years. At the close of May, the stock market was some 36 percent ahead of its March low, and on June 10 the NASDAQ Composite closed above 10,000 for the first time. While actions at the federal level seeded the comeback, economic data took a decided turn for the better, albeit after being beaten down. In May, retail sales rebounded by 17.7 percent—the largest monthly surge on record—and housing starts climbed 4.3 percent, with building permits jumping 14.4 percent. State-level actions also began to pay off, as quarantines, masks, social distancing and other measures began to bend the curve of new cases from upward-sloping to downward.

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Many questioned the market’s strong performance in the face of a dire and potentially long-lasting threat like the coronavirus. And, indeed, the market did suffer bouts of doubt, such as June 11 when it encountered its worst decline in three months (a one-day loss of 5.9 percent for the S&P 500^®). Coronavirus infections rising in more than 20 states—a trend that would continue through the end of the quarter and beyond—and an overall atmosphere of uncertainty both played roles in the sell-off. Nevertheless, the market quickly righted itself and buying continued through June, with the S&P 500^® turning in its best quarter since 1998 and one of the 10 best quarters since 1950, according to CBS MarketWatch.

Liberty All-Star^® Equity Fund

In the strong investment environment, Liberty All-Star Equity Fund outperformed in the second quarter of 2020. The Fund returned 23.38 percent with shares valued at net asset value (NAV) with dividends reinvested and 21.27 percent with shares valued at market price with dividends reinvested. (Fund returns are net of expenses.) Both were higher than returns posted by the DJIA and the S&P 500^®, trailing only the outsized gain posted by the NASDAQ Composite Index. The Fund’s return also topped that of its primary benchmark, the Lipper Large-Cap Core Mutual Fund Average, which returned 19.40 percent.

The challenging first quarter caused Fund returns to lag for the first half of the year. The Fund returned -5.83 percent with shares valued at NAV with dividends reinvested and -11.17 percent with shares valued at market price with dividends reinvested. This compares to -4.41 percent for the Lipper benchmark and to -3.08 percent, -8.43 percent and 12.67 percent, respectively, for the S&P 500^®, the DJIA and the NASDAQ Composite.

Continuing a long-term trend, growth style stocks outperformed value stocks in the second quarter. To illustrate, the Russell 1000^® Growth Index returned 27.84 percent, approaching double the 14.29 percent return posted by its value counterpart. This serves to highlight the strength of the Fund’s second quarter outperformance, as the Fund has a 60/40 overweight to the value style (three value managers and two growth managers). Further, it underscores the rigorous analytical work of the Fund’s managers as they execute their discrete investment styles and strategies. Another characteristic of the second quarter—as well as the full first half—that should be cited is the concentrated, narrow nature of the rally. Most of the return generated by the S&P 500^® can be attributed to a very few large- and mega-cap stocks, primarily in the technology sector. To illustrate how narrow the market was, the S&P 500^® generated a -3.08 percent return year to date through June 30. Yet most stocks in the index did not fare nearly as well; the median stock in the S&P 500^® had a return that was more than 800 basis points lower, at -11.50 percent. Further to the point, the S&P 500^® is a capitalization-weighted index, meaning that stocks with large capitalizations receive a heavier weighting than those with lesser capitalizations. As a result, the -3.08 percent cap-weighted return of the S&P 500^® declines to -10.77 percent when the index is equally weighted, i.e., when the effect of size is removed and the performance of each stock is treated equally.

Returning to Fund-specific matters, in the second quarter Fund shares traded in a much narrower discount range relative to their underlying NAV compared to the first quarter. For the most recent quarter, the discount ranged from -3.4 percent to -10.2 percent, whereas the range was a premium of 2.5 percent to a discount of -21.3 percent in the preceding quarter.

In accordance with the Fund’s distribution policy, the Fund paid a distribution of $0.14 per share in the second quarter. The Fund’s distribution policy has been in place since 1988 and is a major component of the Fund’s total return. These distributions add up to $27.86 per share for a total of more than $3.0 billion since 1987 (the Fund’s first full calendar year of operations). We continue to emphasize that shareholders should include these distributions when determining the total return on their investment in the Fund.

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In June, the Fund made a change among its five investment managers, retaining Fiduciary Management, Inc., to replace Macquarie Investment Management as one of our value style managers. To introduce Fiduciary Management, we have included an interview with the firm’s CEO in this semi-annual report and invite shareholders to read it (beginning on page 9).

We are relieved that equity markets staged such a dramatic turnaround in the second quarter and gratified, of course, that the Fund not only fully participated but outperformed even when, as discussed earlier, three of its five investment managers adhere to value style investing, which lagged considerably compared with the growth style. Challenges await, no doubt, as the nation and the world cope with and seek to conquer a very dangerous pathogen. Be assured we will remain diligent in our management of the Fund and dedicated to the best long-term interests of our shareholders.

Sincerely,

William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star^® Equity Fund

The views expressed in the President’s letter and the Manager Interview reflect the views of the President and Manager as of July 2020 and may not reflect their views on the date this report is first published or anytime thereafter. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions and the Fund disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent.

Performance returns for the Fund are total returns, which include dividends. Returns are net of management fees and other Fund expenses.

The returns shown for the Lipper Large-Cap Core 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 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 35.

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.

DISTRIBUTION POLICY

The current policy 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. Sources of distributions to shareholders may include ordinary dividends, long-term capital gains and return of capital. The final determination of the source of all distributions in 2020 for tax reporting purposes will be made after year end. 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

*      Because the Fund is actively managed, there can be no guarantee that the Fund will continue to hold securities of the indicated issuers and sectors in the future.

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The following are the major ($5 million or more) stock changes - both purchases and sales - that were made in the Fund’s portfolio during the second quarter of 2020, excluding transactions from the transition to Fiduciary Management, Inc.

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THE FUND’S ASSETS ARE APPROXIMATELY EQUALLY DISTRIBUTED AMONG THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:

ALPS Advisors, Inc., the investment advisor to the Fund, has the ultimate authority (subject to oversight by the Board of Trustees) 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 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^® Index.

PORTFOLIO CHARACTERISTICS As of June 30, 2020 (Unaudited)

 

	Investment Style Spectrum
	Value				Growth
	PZENA	FIDUCIARY	ARISTOTLE	SUSTAINABLE	TCW	TOTAL FUND	S&P 500® INDEX
Number of Holdings	37	30	44	29	30	146*	505
Percent of Holdings in Top 10	39%	45%	38%	45%	55%	21%	27%
Weighted Average Market Capitalization (billions)	$42	$101	$144	$328	$301	$186	$389
Average Five-Year Earnings Per Share Growth	-2%	10%	12%	18%	31%	14%	13%
Dividend Yield	2.9%	1.7%	1.8%	0.7%	0.5%	1.5%	1.8%
Price/Earnings Ratio**	10x	18x	17x	40x	41x	20x	23x
Price/Book Value Ratio	0.9x	3.0x	2.2x	8.2x	9.1x	2.4x	3.6x

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Patrick J. English, CFA Chairman, CEO & CIO Fiduciary Management, Inc.

FIDUCIARY MANAGEMENT EARNS ITS RETURNS BY OUTWAITING PERIODS OF MARKET SCHIZOPHRENIA

Fiduciary Management, Inc., is the newest of the Fund’s five investment managers, having been retained in June 2020 to replace Macquarie Investment Management. For the Fund, Fiduciary Management utilizes a business owner’s approach to investing, thoroughly examining the economics of the business and the quality of the management team with the goal of investing in durable business franchises that are selling at a discount to their underlying value. To introduce the firm to Fund shareholders, we recently spoke with Patrick J. English, CFA, Fiduciary Management’s Chairman, CEO and CIO. The Fund’s Investment Advisor, ALPS Advisors, Inc., conducted the interview.

As this is your first manager interview for a Liberty All-Star Equity Fund shareholder report, perhaps we could start by asking you to summarize the most important attributes that Fund investors should know about Fiduciary Management. What do you believe are the firm’s most distinctive characteristics, i.e., those factors that separate it from other large-cap value managers? And, a related question: Please describe key characteristics of the firm itself… attributes such as founding/history, assets under management, staff size and composition, ownership and culture.

Fiduciary Management, Inc. was founded in 1980 in Milwaukee and today we manage $16 billion in assets. We are employee owned—18 out of 29 employees are owners—and our sole focus is managing money for our clients. We have one investment team, one philosophy and one process that manifests itself in four equity strategies: U.S. Large Cap, U.S. Small Cap, U.S. All Cap and International Equity. We are long-term investors with a bottom-up, fundamental, focused approach. The Fiduciary Large Cap portfolio, in which Liberty All-Star Equity Fund is invested, comprises 30 high-quality business franchises that are trading at a discount and have management teams that think and act like owners.

Several differentiating characteristics describe Fiduciary Management. The proverbial saying “we eat our own cooking” applies to all of us at the firm. We believe our direct investment in our portfolio, as well as the firm itself, helps properly align our interests with those of our clients. Although that does not guarantee investment success, it does add an additional level of care and due diligence to our research process.

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The money management business is extremely competitive and the barriers to entry are quite low. Many managers have the same research tools that we have in analyzing companies, so we are not unique in that sense. The key, of course, is how we interpret and act on that information in making our investment decisions. We have been managing money using the same philosophy and process for over 40 years. As a result, we benefit from institutional memory in the sense that we know where different businesses have been valued over many market cycles.

Finally, we always ask ourselves before we invest in a company, What could potentially go wrong with this investment versus what could go right? The margin of safety is important—meaning the price of any investment should be low enough that we can profit—or simply avoid a loss—even if things go wrong. This healthy dose of skepticism provides an effective way of limiting downside risk in our portfolios.

Can you summarize the firm’s investment process and how it contributes to long-term portfolio results?

We take a business owners approach to investing, which means we approach the valuation of each potential investment as if we were to purchase the company or business outright. We are usually coming into a stock when there is some sort of controversy or cloud over the fundamentals. Our holding period is long, so we buy a company when there is uncertainty and wait for the uncertainty to lift and the fundamentals to turn, realizing our returns that way. In other words, we like to take advantage of the market’s schizophrenia.

“We eat our own cooking: We believe our direct investment in our portfolio, as well as the firm itself, helps properly align our interests with those of our clients.”

In a typical calendar year, we will average three to five new purchases. The research process into a prospective portfolio company can take several weeks, and in some cases months. We focus on three areas: First, is this company a good business? The company should provide a product or service through a cost-effective system that is unique and time-consuming to replicate. A good business will typically have recurring revenue through long-term contracts or relationships. Second, is the company trading at a reasonable valuation? We focus more on what is happening on the balance sheet than the income statement. We want to find companies that are trading at a reasonable valuation and earn their cost of capital over a cycle. Greater emphasis is placed on the enterprise value/sales ratio rather than the P/E ratio and the margin structure rather than the growth rate. Third, we assess company management. The key to successfully evaluating a management team is to divorce the stock price from “management ability” and focus on the areas involved in running the company that management can control.

As the research continues, our analysts are trained to try and kill an idea early in the process to save time. If the idea cannot be killed, and a high level of conviction is achieved, the appropriate weighting—considering factors such as liquidity and valuation—is determined between the analyst, myself and Jonathan Bloom, our Director of Research, and then implemented across all of our portfolios in an equitable manner.

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Please identify two portfolio holdings that serve as good examples of the Fiduciary Management philosophy, strategy and process and, briefly, why.

Two holdings that I would cite are Berkshire Hathaway (BRK-B) and Masco Corporation (MAS).

Berkshire Hathaway owns a high-quality group of businesses, including those in insurance/reinsurance, freight rail transportation, utilities and energy, manufacturing, services, retail and finance. The shares have sold off meaningfully and are at one of their widest discounts to their intrinsic value. Berkshire has been criticized for holding too much cash, $130 billion, and not making many purchases or acquisitions in recent years. We applaud the management team for being patient in an extremely expensive and stretched equity market. Berkshire Hathaway’s stock price is currently $180 for the “B” shares and we estimate a conservative intrinsic value of the business to be $228/share, meaning they are priced at a 22 percent discount. If we have a bear market that lasts more than 30 days Berkshire should be a safe haven, and Berkshire should find a home for that excess cash and further build the value of the business.

Masco Corporation’s portfolio of well-recognized brands includes Behr paint and Delta and Hansgrohe faucets, bath and shower fixtures. The company’s competitive advantages include brand strength built over several decades and close alignment with advantaged retail and distribution partners. The business is comprised mostly of low-ticket, high-impact home improvement products in growing categories with a demand profile that has proven relatively resilient during periods of economic weakness. For example, 89 percent of sales is in the repair and remodel segment. The business has a strong balance sheet, with $1.7 billion in cash, and low capital requirements. Masco has generated positive free cash flow every year for more than three decades and trades at 15.5x long-term median earnings per share.

“Our holding period is long, so we buy a company when there is uncertainty and wait for the uncertainty to lift and the fundamentals to turn … in other words, we like to take advantage of the market’s schizophrenia.”

Many thanks for the insights into Fiduciary Management and welcome to Liberty All-Star Equity Fund.

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