The Fund did not have any securities that used significant unobservable
inputs (Level 3) in determining fair value during the period.
The Fund currently has a policy of paying distributions on
its shares of beneficial interest totaling approximately 10% of its net asset value per year. The distributions are payable in
four quarterly distributions of 2.5% 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. Distributions to shareholders are recorded on ex-date.
An investment in shares is subject to investment risk, including
the possible loss of the entire amount invested. An investment in shares represents an indirect investment in the securities owned
by the Fund, most of which are anticipated to be traded on a national securities exchange or in the over-the-counter markets. The
value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Shares at any
point in time may be worth less than their original cost, even after taking into account the reinvestment of dividends and other
distributions.
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement
of assets and liabilities of Liberty All-Star® Equity Fund (the “Fund”), including the schedule of investments,
as of December 31, 2020, the related statement of operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and
the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects,
the financial position of the Fund as of December 31, 2020, and the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial
statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is
not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements
and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2020, by correspondence with
the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 25, 2021
We have served as the auditor of one or more investment companies
advised by ALPS Advisors, Inc. since 2007.
|
Liberty All-Star® Equity Fund
|
Automatic Dividend Reinvestment
and
Direct Purchase Plan
|
(Unaudited)
Under the Fund’s Automatic Dividend
Reinvestment and Direct Purchase Plan (the “Plan”), shareholders automatically participate and have all their Fund
dividends and distributions reinvested by Computershare Trust Company, N.A., as agent for participants in the Plan (the “Plan
Agent”), in additional shares of the Fund. For further information, call Investor Assistance at 1-800-LIB-FUND (1-800-542-3863)
weekdays between 9 a.m. and 5 p.m. Eastern Time.
Shareholders whose shares are held in the
name of a brokerage firm, bank or other nominee can participate in the Plan only if their brokerage firm, bank or nominee is able
to do so on their behalf. Shareholders participating in the Plan through a brokerage firm may not be able to transfer their shares
to another brokerage firm and continue to participate in the Plan.
Under the Plan, all dividends and distributions
will be reinvested in additional shares of the Fund. Distributions declared payable in cash will be reinvested for the accounts
of participants in the Plan in additional shares purchased by the Plan Agent on the open market at prevailing market prices. If,
prior to the Plan Agent’s completion of such open market purchases, the market price of a share plus estimated brokerage
commissions exceeds the net asset value, the remainder of the distribution will be paid in newly issued shares valued at net asset
value (but not at a discount of more than 5% from market price). Distributions declared payable in shares (or cash at the option
of shareholders) are paid to participants in the Plan entirely in newly issued full and fractional shares valued at the lower of
market value or net asset value per share on the valuation date for the distribution (but not at a discount of more than 5 percent
from market price). Dividends and distributions are subject to taxation, whether received in cash or in shares.
Plan participants have the option of making
additional investments of $100 or more on a monthly basis up to a maximum of $120,000 in a calendar year. These direct purchases
will be invested on or shortly after the 15th of each month and direct purchases should be sent so as to be received by the Plan
Agent at least two business days prior to the next investment date. Barring suspension of trading, direct purchases will be invested
within 35 days after such date. Alternatively, participants can authorize an automatic monthly deduction from a checking or savings
account at a U.S. bank or other financial institution. A participant may withdraw a direct purchase by written notice received
by the Plan Agent at least two business days before such payment is to be invested.
The Plan Agent maintains all shareholder
accounts in the Plan and furnishes confirmations of all transactions in the account, including information needed by shareholders
for tax records. Shares in the account of each Plan participant will be held by the Plan Agent in book-entry or noncertificated
form in the name of the participant, and each shareholder’s proxy will include those shares purchased or received pursuant
to the Plan.
There is no charge to participants for
reinvesting distributions pursuant to the Plan. The Plan Agent’s fees are paid by the Fund, therefore indirectly by shareholders.
There are no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or distributions declared
payable in shares. However, each participant bears a per share fee (which includes any brokerage commissions the Plan Agent is
required to pay) incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of distributions
declared payable in cash.
|
Annual Report | December 31, 2020
|
43
|
|
Liberty All-Star® Equity Fund
|
Automatic Dividend Reinvestment
and Direct Purchase Plan
|
(Unaudited)
With respect to direct purchases, the Plan
Agent will charge $1.25 for purchase by check and $2.00 for automatic investment transactions, plus a per share fee (which includes
any brokerage commissions the Plan Agent is required to pay). Sales of shares held in the Plan will also be subject to a service
fee of $2.50 and a per share fee currently $0.10. All fees described in this summary are subject to change. Please contact the
Plan Agent for the current fees.
Shareholders may terminate their participation
in the Plan by notifying the Plan Agent by telephone, through the Internet or in writing. Such termination will be effective immediately
if notice is received by The Plan Agent prior to any dividend record date and all subsequent dividends and distributions will be
paid in cash instead of shares.
The Fund reserves the right to amend or terminate the Plan.
The full text of the Plan may be found on the Fund’s website
at www.all-starfunds.com.
|
Liberty All-Star® Equity Fund
|
Additional Information
|
(Unaudited)
TAX INFORMATION
All 2020 distributions whether received in cash or shares of
the Fund consist of the following:
|
(1)
|
ordinary dividends
|
|
(2)
|
long-term capital gains
|
The table below details the breakdown of each 2020 distribution
for federal income tax purposes.
|
|
|
|
Total Ordinary Dividends
|
|
|
Record Date
|
Payable Date
|
Amount
per Share
|
Qualified
|
Non-
Qualified
|
Long-Term
Capital Gains
|
|
11/15/19*
|
01/02/20
|
$0.17
|
10.83%
|
1.70%
|
87.47%
|
|
01/24/20
|
03/09/20
|
$0.17
|
10.83%
|
1.70%
|
87.47%
|
|
04/24/20
|
06/08/20
|
$0.14
|
10.83%
|
1.70%
|
87.47%
|
|
07/24/20
|
09/08/20
|
$0.16
|
10.83%
|
1.70%
|
87.47%
|
|
11/13/20
|
01/04/21
|
$0.130349
|
10.83%
|
1.70%
|
87.47%
|
|
11/13/20**
|
01/04/21
|
$0.029651
|
–
|
–
|
–
|
|
|
*
|
Pursuant to Section 852 of the Internal Revenue Code,
the taxability of this distribution will be reported in the Form 1099-DIV for 2020.
|
|
|
**
|
Pursuant to Section 852 of the Internal Revenue Code, the taxability of this portion of the distribution will be reported
in the Form 1099-DIV for 2021.
|
Tax Designations
The Fund designates the following as a
percentage of taxable ordinary income distributions for the calendar year ended December 31, 2020:
|
Qualified Dividend Income
|
86.41%
|
|
Dividend Received Deduction
|
79.54%
|
Pursuant to Section 852(b)(3) of the Internal Revenue Code,
Liberty All-Star Equity Fund designated $113,149,388 as long-term capital gain dividends.
|
Annual Report | December 31, 2020
|
45
|
|
Liberty All-Star® Equity Fund
|
Additional Information
|
(Unaudited)
|
Liberty All-Star® Equity Fund
|
Trustees and Officers
|
(Unaudited)
|
PRINCIPAL OFFICERS (continued)
|
|
|
|
|
|
|
Name (Year of Birth) and Address*
|
Position with Funds**
|
Year First Elected or Appointed to Office
|
Principal Occupation(s) During Past Five Years
|
|
Jennifer A. Craig
Year of Birth: 1973
|
Assistant Secretary
|
2017
|
Ms. Craig joined ALPS in 2007 and is currently Assistant Vice President and Paralegal Manager of ALPS. Ms. Craig is also Assistant Secretary of Liberty All-Star Growth Fund, Inc., Financial Investors Trust, Clough Global Dividend and Income Fund, Clough Global Opportunities Fund, Clough Global Equity Fund, Secretary of Principal Real Estate Income Fund and Clerk of Goehring & Rozencwajg Investment Funds. Because of her position with ALPS, Ms. Craig is deemed an affiliate of the Funds as defined under the 1940 Act.
|
|
*
|
The address of each officer, other than Messrs. Parmentier and Haley is: c/o ALPS Fund Services, Inc., 1290 Broadway, Suite 1000, Denver, CO 80203. The address of Messrs. Parmentier and Haley is c/o ALPS Advisors, Inc., One Financial Center, 4th Floor, Boston, MA 02111.
|
|
**
|
Officers are elected annually and each officer will hold such office until a successor has been elected by the Board.
|
Liberty All-Star®
Equity Fund
|
Board Consideration of the Renewal of the Fund
Management & Portfolio Management Agreements
|
(Unaudited)
The Investment Company Act of 1940 requires
that the Board of Trustees (“Board”) of the Liberty All-Star Equity Fund (“Fund”), including all of the
Trustees who are not “interested persons” of the Fund (“Independent Trustees”), annually review the Fund’s
investment advisory agreements and consider whether to renew them for an additional year. At its meeting on September 17, 2020,
the Board, including a majority of the Independent Trustees, conducted such a review and approved the continuation of the Fund
Management Agreement between the Fund and ALPS Advisors, Inc. (“AAI”) and each separate Portfolio Management Agreement
among the Fund and the following independent investment management firms: Aristotle Capital Management LLC (“Aristotle”),
Pzena Investment Management, LLC (“Pzena”), Sustainable Growth Advisers, LP (“Sustainable”), and TCW Investment
Management Company (“TCW”). Aristotle, Pzena, Sustainable and TCW are collectively referred to as “Portfolio
Managers” and each as a “Portfolio Manager.”
Prior to the Board’s action, the
Independent Trustees met to consider management’s recommendations with respect to the renewal of the Fund Management Agreement
and the Portfolio Management Agreements (each, an “Agreement” and, collectively, the “Agreements”). In
reaching its decision to renew each Agreement, the Board considered the overall fairness of each Agreement and whether each Agreement
was in the best interests of the Fund. The Board further considered factors it deemed relevant with respect to the Fund, including
(1) the nature, extent and quality of services provided to the Fund by AAI, its affiliates, and each Portfolio Manager; (2) the
performance of the Fund and the Portfolio Managers; (3) the level of the Fund’s management and portfolio management fees
and expense ratios; (4) the costs of the services provided and profits realized by AAI and its affiliates from their relationship
with the Fund; (5) the extent to which economies of scale would be realized as the Fund grows and whether fee levels will reflect
economies of scale for the benefit of shareholders; (6) the “fall-out” benefits to AAI, each Portfolio Manager and
their respective affiliates (i.e., any direct or indirect benefits to be derived by AAI, each Portfolio Manager and their respective
affiliates from their relationships with the Fund); and (7) other general information about AAI and each Portfolio Manager. In
considering each Agreement, the Board did not identify any single factor or information as all-important or controlling and each
Independent Trustee may have attributed different weight to each factor.
The Board considered these factors in the
context of the Fund’s multi-manager methodology, which seeks to achieve more consistent and less volatile performance over
the long term than if a single Portfolio Manager was employed. The Fund allocates its portfolio assets among Portfolio Managers
recommended by AAI and approved by the Board, currently five for the Fund. The Board considered that each Portfolio Manager employs
a different investment style and/or strategy, and from time to time AAI rebalances the Fund’s portfolio assets among the
Portfolio Managers. The Board also took into account that AAI continuously analyzes and evaluates each Portfolio Manager’s
investment performance and portfolio composition and, from time to time, recommends changes in the Portfolio Managers.
In connection with its deliberations, the
Board considered information furnished throughout the year at regular Board meetings, as well as information prepared specifically
in connection with the annual renewal and approval process. Information furnished and discussed throughout the year included AAI’s
analyses of the Fund’s investment performance and related financial information for the Fund, presentations given by the
Fund’s Portfolio Managers, as well as periodic reports on legal, compliance, brokerage commissions and execution and other
services provided by AAI, the Portfolio Managers and their affiliates. Information
furnished specifically in connection with the renewal process included, among other things, a report of the Fund’s investment
performance over various time periods as compared to a peer universe and a market index and the Fund’s fees and expenses
as compared to comparable groups of closed-end funds and open-end multi-managed funds based, in part, on information prepared by
AAI regarding review of the Lipper peer groups. The information provided by AAI generally included information reflecting the Fund’s
management fees, expense ratios, investment performance and profitability, including AAI’s profitability with respect to
the Fund.
|
Annual Report | December 31, 2020
|
53
|
Liberty All-Star®
Equity Fund
|
Board Consideration of the Renewal of the Fund
Management & Portfolio Management Agreements
|
(Unaudited)
As part of the process to consider the
Agreements, legal counsel to the Independent Trustees requested information on behalf of the Independent Trustees from AAI and
each Portfolio Manager. In response to these requests, the Independent Trustees received reports from AAI and each Portfolio Manager
that addressed specific factors designed to inform the Independent Trustees’ consideration of each Agreement. In addition,
counsel also provided the Independent Trustees and the Board with a memorandum discussing the legal standards applicable to their
consideration of the Agreements. In considering the proposed renewals, the Board considered all factors they believed to be relevant,
including those discussed below. The Board did not identify any one factor as being dispositive.
Based on their evaluation of all material
factors, the Board unanimously concluded that the terms of each Agreement were reasonable and fair and that the renewal of each
of the Agreements was in the best interests of the Fund and its shareholders. The following is a summary of the Board’s considerations
and conclusions during the full Board meeting and Executive Session regarding these matters.
Nature, Extent and Quality of the Services
Provided
The Board considered the nature, extent and quality of the portfolio manager selection, evaluation and monitoring services provided
by AAI, and the portfolio management services provided by each Portfolio Manager, in light of the investment objective of the Fund.
The Board also considered the nature, extent and quality of the administrative services provided to the Fund by ALPS Fund Services,
Inc., an affiliate of AAI. The Board considered the steps that AAI has taken to encourage strong performance, including AAI’s
willingness to recommend Portfolio Manager changes when necessary to address performance issues.
The Board considered the background and
experience of the personnel at AAI responsible for Portfolio Manager selection, evaluation and monitoring for the Fund and the
personnel at each Portfolio Manager responsible for managing the Fund’s portfolio. The Board also considered the overall
financial strength of AAI and each Portfolio Manager, the effect on the Fund of any turnover in personnel at each Portfolio Manager,
the insurance maintained by AAI and each Portfolio Manager and the compliance records of AAI and each Portfolio Manager. The Board
concluded that the nature, extent and quality of the services provided by AAI and each Portfolio Manager up for renewal were appropriate
and consistent with the terms of the Agreements and that the Fund was likely to continue to benefit from services provided under
the Agreements.
Liberty All-Star®
Equity Fund
|
Board Consideration of the Renewal of the Fund
Management & Portfolio Management Agreements
|
(Unaudited)
Investment Performance
The Board considered the long-term and short-term investment performance of the Fund over multiple periods, which generally included
annual total returns both on an absolute basis and relative to an appropriate benchmark and/or Lipper peer universe based on materials
showing the performance of the Lipper peer group. The Board considered the Fund’s performance based on both net asset value
(“NAV”) and market price and, in general, considered long-term performance to be more important in its evaluation than
short-term performance. In addition, the Board considered the performance of the allocated portions of the Fund in the context
of the Portfolio Managers’ different investment strategies and styles and the contribution of each Portfolio Manager to the
Fund’s overall strategy and performance.
The Board received information which indicated
among other things that, based on NAV, the Fund underperformed the Lipper Large-Cap Core Mutual Fund Average (“Lipper Average”)
but was close to the median for the three-, five-, ten- and twenty-year periods ending June 30, 2020.
In addition to the performance of the Fund
and each Portfolio Manager’s sleeve of the Fund, the Board considered management’s and the Portfolio Managers’
explanations for the Fund’s performance and the relevant benchmarks and peer groups. The Board accepted the explanations
and determined that the performance information and explanations supported the renewal of the Agreements.
Costs of the Services Provided to the
Fund
The Board considered the fees paid by the Fund to AAI and the fees paid by AAI to the Portfolio Managers as well as information
provided by AAI about the management fees, overall expense ratio and expense reimbursement by AAI for selected closed-end funds
and multi-manager open-end equity funds. The Board considered that the Fund’s management and administration fees, and its
total expense ratio were lower than the median of a representative group of closed-end funds selected by AAI. The Board also considered
that the Fund’s management fee was higher than the median for the multi-manager open-end equity funds, but that the Fund’s
total expense ratio was lower.
The Independent Trustees took into account
that the Fund’s higher contractual management fees and expense ratios were generally consistent with the higher costs and
greater complexity associated with the management of a closed-end multi-manager fund.
The Board considered that AAI currently
does not have any institutional clients with investment objectives and strategies comparable to those of the Fund. The Board considered
the breakpoint schedule that lowers the management fee rate paid by the Fund as the Fund’s assets increase. The Board also
considered the management fees paid to the Portfolio Managers and the fee rates charged by the Portfolio Managers to their other
accounts, including institutional accounts. The Board considered that the Portfolio Managers were paid by AAI, not the Fund. The
Board also considered the differences in the level of services provided by and the differences in responsibility of AAI and the
Portfolio Managers to the Fund and to other accounts. The Board concluded that the management fees payable by the Fund to AAI and
the fees payable by AAI to the Portfolio Managers were reasonable in relation to the nature and quality of the services provided,
taking into account the management fees paid by selected closed-end funds and open-end equity funds.
|
Annual Report | December 31, 2020
|
55
|
Liberty All-Star®
Equity Fund
|
Board Consideration of the Renewal of the Fund
Management & Portfolio Management Agreements
|
(Unaudited)
Profitability and Costs of Services
to AAI
The Board considered the level of profits realized by AAI in connection with the operation of the Fund. The Board considered the
profitability information setting forth recent overall profitability of the Fund to AAI, as well as overall profitability information
relating to certain prior calendar years. In reviewing the information, attention was given to the methodology followed in allocating
costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies
may be reasonable while producing different results. The Board considered management’s ongoing costs and expenditures in
providing and improving services for the Fund as well as the ongoing need to meet regulatory and compliance requirements. In addition,
the Board considered information prepared by management comparing the profitability of AAI on an overall basis to other investment
company managers. The Board also considered the extent to which AAI and its affiliates might derive ancillary benefits from the
Fund, noting that an affiliate of AAI serves as the Fund’s administrator and receives compensation for acting in this capacity.
The Board considered that it does not regard
Portfolio Manager profitability as meaningful to an evaluation of the Portfolio Manager Agreements because the willingness of the
Portfolio Managers to serve in such capacity depends primarily upon arm’s-length negotiations with AAI. The Board and AAI
generally are aware of the fees charged by the Portfolio Managers to other clients, and the Board believes that the fees agreed
upon with the Portfolio Managers are reasonable in light of the quality of investment advisory services rendered. The Board reached
its conclusion based in part on the fees that the Portfolio Managers charge other clients, the reasonableness of the aggregate
management fees paid by the Fund and the fact that each Portfolio Manager’s fee is paid by AAI and not the Fund. The Board
understood that, as a business matter, AAI was entitled to earn reasonable profits for its services to the Fund. The Board determined
that AAI’s profitability was reasonable in relation to the services provided and to the costs of providing management services
to the Fund and supported the renewal of the Agreements.
Extent of Economies of Scale as the
Fund Grows and Whether Fee Levels Reflect Economies of Scale
The Board considered whether economies of scale are realized by AAI as the Fund grows larger and the extent to which this is reflected
in the level of management fees charged. The Board took into consideration the fee breakpoint schedules under the Agreements and
concluded that the schedules reflect economies of scale with respect to the selection, evaluation and monitoring of Portfolio Managers
and other services performed by AAI and the management of Fund assets by each Portfolio Manager. In this regard, the Board considered
that the Fund has reached an asset size at which the Fund and its shareholders are benefiting from reduced management fee rates
due to breakpoints in the management fees.
Based on the foregoing, the Board concluded
that the Fund was realizing economies of scale under the Agreements and management fee schedule, which supports the renewal of
the Agreements.
Benefits to be Derived from the Relationship
with the Fund
The Board also considered the potential ancillary, or “fall-out,” benefits that AAI or the Portfolio Managers might
receive in connection with their association with the Fund. In its consideration of the Agreements, the Board considered, among
other things, that AAI and the Portfolio Managers may derive ancillary benefits from the Fund’s operations. For example,
under the Agreements, although it is not currently doing so,
AAI may request that transactions giving rise to brokerage commissions be executed through brokers and dealers that provide brokerage
or research services to the Fund or AAI. Each Portfolio Manager, through its position as a Portfolio Manager to the Fund, also
may engage in soft dollar transactions.
Liberty All-Star®
Equity Fund
|
Board Consideration of the Renewal of the Fund
Management & Portfolio Management Agreements
|
(Unaudited)
In advance of the meeting, the Board received
information regarding each Portfolio Manager’s procedures for executing portfolio transactions for the allocated portion(s)
of the Fund and each Portfolio Manager’s soft dollar policies and procedures. In addition, the Board considered that a Portfolio
Manager may be affiliated with registered broker-dealers who may, from time to time, receive brokerage commissions from the Fund
in connection with the purchase and sale of portfolio securities; provided, however, that those transactions, among other things,
must be consistent with seeking best execution. The Board determined that the foregoing ancillary benefits were consistent with
the renewal of the Agreements.
Based on its evaluation of all material
factors, the Board unanimously concluded that the terms of each Agreement were reasonable and fair and that the renewal of each
Agreement was in the best interests of the Fund and its shareholders.
|
Annual Report | December 31, 2020
|
57
|
|
Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
The following information in this annual
report is a summary of certain information about the Fund and changes since the Fund’s most recent annual report dated December
31, 2019 (the “prior disclosure date”). This information may not reflect all of the changes that have occurred since
you purchased the Fund.
Portfolio Manager Information
Since the prior disclosure date, Fiduciary Management, Inc. was hired as a sub-adviser to replace Macquarie Investment Management.
Fund Organizational Structure
Since the prior disclosure date, there have been no changes in the Fund’s charter or by-laws that would delay or prevent
a change of control of the Fund that have not been approved by shareholders.
Investment Objective
There have been no changes in the Fund’s investment objective since the prior disclosure date that have not been approved
by shareholders.
The Fund’s investment objective is
to seek total investment return, comprised of long-term capital appreciation and current income. It seeks its investment objective
through investment primarily in a diversified portfolio of equity securities.
Under normal market conditions, the Fund
invests at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities, defined as common stocks
and securities convertible into common stocks such as bonds and preferred stocks, and securities having common stock characteristics
such as warrants and rights to purchase equity securities (although, as a non-fundamental policy, not more than 20% of the value
of the Fund’s total assets may be invested in rights and warrants). The Fund may lend its portfolio securities, write covered
call and put options and engage in options and futures strategies.
Although under normal market conditions
the Fund will remain substantially fully invested in equity securities, up to 20% of the value of the Fund’s net assets may
generally be invested in short-term money market instruments, including certificates of deposit (negotiable certificates issued
against bank deposits), other interest-bearing bank deposits such as savings and money market accounts, and bankers’ acceptances
(short-term bank-guaranteed credit instruments used to finance transactions in goods) of domestic branches of U.S. banks having
assets of not less than $1 billion, obligations issued or guaranteed by the U.S. Government and its agencies and instrumentalities
(“U.S. Government Securities”), commercial paper (unsecured short-term promissory notes issued by corporations) rated
not lower than A-1 by Standard & Poor’s (“S&P”), or Prime-1 by Moody’s Investors Service, Inc.
(“Moody’s”), short-term corporate debt securities rated not lower than AA by S&P or AA by Moody’s,
and repurchase agreements with respect to the foregoing (collectively, “Short-Term Money Market Instruments”). The
Fund may temporarily invest without limit in Short-Term Money Market Instruments for defensive purposes when AAI or the Portfolio
Managers deem that market conditions are such that a more conservative approach to investment is desirable. Taking a temporary
defensive position may prevent the Fund from achieving its investment objective.
|
Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Up to 20% of the Fund’s net assets
may be invested in below-investment grade securities. The below investment grade securities in which the Fund may invest are rated
below BBB. This rating is defined by Standard & Poor’s as investment grade. The Fund does not currently intend to invest
more than 5% of its net assets in below investment grade securities.
The Fund also may invest without limitation
in foreign securities. The Fund does not currently intend to invest more than 5% of its net assets in foreign securities. Because
American Depository Receipts (“ADRs”) are denominated in U.S. dollars and there is a large liquid market in the U.S.
for them, ADRs are not considered foreign securities for purposes of calculating the Fund’s foreign securities exposure.
The Fund’s investment objective of
seeking total investment return and its policy of investing under normal market conditions at least 80% of the value of its net
assets (plus borrowings for investment purposes) in equity securities, as well as certain of its investment restrictions, are fundamental
and may not be changed without a majority vote of the Fund’s outstanding shares. Under the 1940 Act, a “majority vote”
means the vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting at which the holders of more than 50%
of the outstanding shares of the Fund are present or represented, or (b) more than 50% of the outstanding shares of the Fund. Non-fundamental
policies may be changed by vote of the Board of Trustees.
Principal Investment Strategies
There have been no changes in the Fund’s Principal Investment Strategies and Policies since the prior disclosure date.
Investment Practices
The following describes certain of the investment practices in which one or more of the Portfolio Managers may engage, each of
which may involve certain special risks.
Lending of Portfolio Securities.
The Fund, in order to generate additional income, may lend its portfolio securities (principally to broker-dealers) where such
loans are callable at any time and are continuously secured by collateral (cash or U.S. Government Securities) equal to and not
less than the market value, determined daily, of the securities loaned. The Fund would receive amounts equal to the interest on
the securities loaned. It would also be paid for having made the loan. Any cash collateral pursuant to these loans would be invested
in Short-Term Money Market Instruments. The Fund could be subjected to delays in recovering the loaned securities in the event
of default or bankruptcy of the borrower. The Fund will limit such lending to not more than 30% of the value of the Fund’s
total assets. The Fund may pay fees to its custodian bank or others for administrative services in connection with securities loans.
Repurchase Agreements. The Fund
may enter into repurchase agreements with banks or broker-dealer firms whereby such institutions sell U.S. Government Securities
or other securities in which it may invest to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. The resale price is greater than the purchase price, reflecting an agreed-upon interest rate that is effective
during the time between the purchase and resale and is not related to the stated interest rate on the purchased securities. The
Fund requires the seller of the securities to maintain on deposit with the Fund’s custodian bank securities in an amount
at all times equal to or in excess of the value of the repurchase
agreement. In the event that the seller of the securities defaults on its repurchase obligation or becomes bankrupt, the Fund could
receive less than the repurchase price on the sale of the securities to another party or could be subjected to delays in selling
the securities. Under normal market conditions, not more than 20% of the Fund’s net assets will be invested in Short-Term
Money Market Instruments, including repurchase agreements, and not more than 10% of the Fund’s net assets will be invested
in repurchase agreements maturing in more than seven days.
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Annual Report | December 31, 2020
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59
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Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Securities of Other Investment Companies.
The Fund may invest in the securities of other investment companies, including open-end mutual funds, closed-end funds, unit investment
trusts, private investment companies and offshore investment companies. An investment in an investment company involves risks similar
to those of investing directly in the investment company’s portfolio securities, including the risk that the value of the
portfolio securities may fluctuate in accordance with changes in the financial condition of their issuers, the value of stocks
and other securities generally, and other market factors.
In addition, investing in other investment
companies involves certain other risks, costs, and expenses for the Fund. If the Fund invests in another investment company, the
Fund will be charged its proportionate share of the advisory fees and other operating expenses of such investment company, which
are in addition to the advisory fees and other operational expenses charged to the Fund. In addition, the Fund could incur a sales
charge in connection with purchasing an investment company security or a redemption fee upon the redemption of such security. An
investment in the shares of a closed-end investment company may also involve the payment of a substantial premium over, while sales
of such shares may be made at a substantial discount from, the NAV of the issuers’ portfolio securities. Investments in securities
of other investment companies will be made in compliance with applicable 1940 Act limitations. To the extent that the Fund invests
in the securities of other investment companies, the Fund’s shareholders will indirectly bear a pro rata share of the investment
company’s expenses in addition to the expenses associated with an investment in the Fund. The Fund may invest in investment
companies managed by AAI or other affiliates of AAI.
Exchange-Traded Funds. The Fund
may invest in exchange traded funds (“ETFs”). ETFs are ownership interests in unit investment trusts, depositary receipts,
and other pooled investment vehicles that are traded on an exchange and that hold a portfolio of securities or stocks (the “Underlying
Securities”). The Underlying Securities are typically selected to correspond to the stocks or other securities that comprise
a particular broad based, sector or international index, or that are otherwise representative of a particular industry sector.
An investment in an ETF involves risks similar to investing directly in each of the Underlying Securities, including the risk that
the value of the Underlying Securities may fluctuate in accordance with changes in the financial condition of their issuers, the
value of stocks and other securities generally, and other market factors.
The performance of an ETF will be reduced
by transaction and other expenses, including fees paid by the ETF to service providers. Investors in ETFs are eligible to receive
their portion of dividends, if any, accumulated on the securities held in the portfolio, less fees and expenses of the ETF. Typically,
ETFs are investment companies. However, the term is used in the industry in a broad way to include securities issued by entities
that are not investment companies. To the extent an ETF is an investment company, the limitations applicable
to the Fund’s ability to purchase securities issued by other investment companies will apply.
|
Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Options and Futures Strategies.
The Fund may seek to increase the current return of the Fund’s portfolio by writing covered call or put options with respect
to the types of securities in which the Fund is permitted to invest. Call options written by the Fund give the purchaser the right
for a stated period to buy the underlying securities from the Fund at a stated price; put options written by the Fund give the
purchaser the right for a stated period to sell the underlying securities to the Fund at a stated price. By writing a call option,
the Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price
of the option; by writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security at
a price in excess of its current market value.
The Fund may purchase put options to protect
its portfolio holdings in the underlying security against a decline in market value. It may purchase call options to hedge against
an increase in the prices of portfolio securities that it plans to purchase. By purchasing put or call options, the Fund, for the
premium paid, acquires the right (but not the obligation) to sell (in the case of a put option) or purchase (in the case of a call
option) the underlying security at the option exercise price, regardless of the then current market price.
The Fund may also seek to hedge against
declines in the value of securities owned by it or increases in the price of securities it plans to purchase, or to gain or maintain
market exposure, through the purchase of stock index futures and related options. For example, the Fund may purchase stock index
futures and related options to enable a newly appointed Portfolio Manager to gain immediate exposure to underlying securities markets
pending the investment of the portion of the Fund’s portfolio assigned to it. A stock index future is an agreement in which
one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value
of the specific stock index at the close of the last trading day of the contract and the price at which the agreement is made.
Expenses and losses incurred as a result
of the hedging strategies described above will reduce the Fund’s current return.
Transactions in options and futures contracts
may not achieve the intended goals of protecting portfolio holdings against market declines or gaining or maintaining market exposure,
as applicable, to the extent that there is an imperfect correlation between the price movements of the options and futures contracts
and those of the securities to be hedged. In addition, if a Portfolio Manager’s prediction on stock market movements is inaccurate,
the Fund may be worse off than if it had not engaged in such options or futures transactions.
RISKS
The Fund is a diversified, multi-managed
closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and there can be no assurance that the Fund will achieve its investment objective.
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Annual Report | December 31, 2020
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61
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Liberty All-Star® Equity Fund
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Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Investment and Market Risk
An investment in the Fund’s shares is subject to investment risk, including the possible loss of the entire amount that you
invest. Your investment in shares represents an indirect investment in the securities owned by the Fund, most of which are traded
on a national securities exchange or in the over-the-counter markets. The value of these securities, like other market investments,
may move up or down, sometimes rapidly and unpredictably. Your shares at any point in time may be worth less than your original
investment, even after taking into account the reinvestment of dividends and other distributions.
Market Discount Risk
In addition, shares of closed-end management investment companies such as the Fund frequently trade at a discount from their NAV.
The Shares were designed primarily for long-term investors, and investors in Shares should not view the Fund as a vehicle for trading
purposes. This risk is separate and distinct from the risk that the Fund’s NAV may decline.
Common Stock Risk
The Fund is not limited in the percentage of its assets that may be invested in common stocks and other equity securities, and
therefore a risk of investing in the Fund is equity risk. Equity risk is the risk that the market value of securities held by the
Fund will fall due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities
held by the Fund participate, and the particular circumstances and performance of particular companies whose securities the Fund
holds. For example: an adverse event, such as an unfavorable earnings report, may depress the value of equity securities of an
issuer held by the Fund; the price of common stock of an issuer may be particularly sensitive to general movements in the stock
market; or a drop in the stock market may depress the price of most or all of the common stocks and other equity securities held
by the Fund. In addition, common stock of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make
anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition.
Common equity securities in which the Fund will invest are structurally subordinated to preferred stocks, bonds and other debt
instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to
greater payment risk than preferred stocks or debt instruments of such issuers. In addition, while broad market measures of common
stocks have historically generated higher average returns than fixed income securities, common stocks have also experienced significantly
more volatility in those returns.
Preferred Securities Risk
Preferred equity securities involve credit risk, which is the risk that a preferred equity security will decline in price, or
fail to pay dividends when expected, because the issuer experiences a decline in its financial status. In addition to credit
risk, investment in preferred equity securities involves certain other risks. Certain preferred equity securities contain
provisions that allow an issuer under certain conditions to skip distributions (in the case of “non-cumulative”
preferred equity securities) or defer distributions (in the case of “cumulative” preferred equity securities).
Preferred equity securities often contain provisions that allow for redemption in the event of certain tax or legal changes
or at the issuer’s call. In the event of redemption, the Fund may not be able to reinvest the proceeds at comparable
rates of return. Preferred equity securities typically do not provide any voting rights, except in cases when dividends are
in arrears beyond a certain time period, which varies by issue. Preferred equity securities
are subordinated to bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income
and liquidation payments, and therefore will be subject to greater credit risk than those debt instruments. Preferred equity securities
may be significantly less liquid than many other securities, such as U.S. Government Securities, corporate debt or common stock.
|
Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Convertible Security Risk
The Convertible Securities that the Fund may invest include bonds and preferred stocks, warrants and rights to purchase equity
(although as a non-fundamental policy, not more than 20% of the value of the Fund’s total assets may be invested in rights
and warrants). Convertible securities generally offer lower interest or dividend yields than non-convertible fixed-income securities
of similar credit quality because of the potential for capital appreciation. The market values of convertible securities tend to
decline as interest rates increase and, conversely, to increase as interest rates decline. However, a convertible security’s
market value also tends to reflect the market price of the common stock of the issuing company, particularly when the stock price
is greater than the convertible security’s conversion price. The conversion price is defined as the predetermined price or
exchange ratio at which the convertible security can be converted or exchanged for the underlying common stock. As the market price
of the underlying common stock declines below the conversion price, the price of the convertible security tends to be increasingly
influenced more by the yield of the convertible security than by the market price of the underlying common stock. Thus, it may
not decline in price to the same extent as the underlying common stock, and convertible securities generally have less potential
for gain or loss than common stocks. However, mandatory convertible securities (as discussed below) generally do not limit the
potential for loss to the same extent as securities convertible at the option of the holder. In the event of a liquidation of the
issuing company, holders of convertible securities would be paid before that company’s common stockholders. Consequently,
an issuer’s convertible securities generally entail less risk than its common stock. However, convertible securities fall
below debt obligations of the same issuer in order of preference or priority in the event of a liquidation and are typically unrated
or rated lower than such debt obligations. In addition, contingent payment convertible securities allow the issuer to claim deductions
based on its nonconvertible cost of debt, which generally will result in deductions in excess of the actual cash payments made
on the securities (and accordingly, holders will recognize income in amounts in excess of the cash payments received). The convertible
securities in which the Fund invests may be rated below investment grade.
Credit Risk
Credit risk is the risk that a security in the Fund’s portfolio will decline in price or fail to make dividend or interest
payments when due because the issuer of the security experiences a decline in its financial status. Preferred and convertible securities
are typically subordinated to bonds and other debt instruments in a company’s capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than those debt instruments.
Management Risk
The Fund is subject to management risk because it is an actively managed investment portfolio. AAI and the Portfolio Managers will
apply investment techniques and risk analyses in selecting Portfolio Managers and making investment decisions for the Fund, respectively,
but there can be no guarantee that these will produce the desired results.
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Annual Report | December 31, 2020
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63
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Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Growth Stock Risk
Currently, approximately 40% of the Fund’s net assets are allocated to Portfolio Managers that utilize a “growth”
approach to investing. Over time, depending on market conditions, this allocation may increase or decrease. Growth stocks are stocks
of companies believed to have above-average potential for growth in revenue and earnings. Prices of growth stocks may be more sensitive
to changes in current or expected earnings than the prices of other stocks. In certain market conditions, growth stocks may not
perform as well as value stocks or the stock market in general.
Value Stock Risk
Currently, approximately 60% of the Fund’s net assets are allocated to Portfolio Managers that utilize a “value”
approach to investing. Over time, depending on market conditions, this allocation may increase or decrease. Value stocks are stocks
of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused
the stocks to be out of favor and, in a Portfolio Manager’s opinion, undervalued. If the Portfolio Manager’s assessment
of a company’s prospects is wrong, the price of the company’s stock may fall or may not approach the value the Portfolio
Manager has placed on it.
Foreign Securities Risk
Investments in foreign securities involve risks in addition to those of investments in U.S. issuers. These risks include political
and economic risks, currency fluctuations, higher transaction costs, less liquidity and greater volatility, delayed settlement,
confiscatory taxation, withholding of taxes and less stringent investor protection and disclosure standards in some foreign markets.
These risks can make investments in foreign issuers more volatile and potentially less liquid than investments in U.S. issuers.
Tax Risk
The Fund may invest in preferred securities, convertible securities or other securities the federal income tax treatment of the
income from which may not be clear or may be subject to recharacterization by the IRS.
The tax treatment of distributions the
Fund reports as “qualified dividend income” may be affected by IRS interpretations of the Code and future changes in
the Code and the Treasury regulations. There can be no assurance as to what portion, if any, of the Fund’s distributions
will constitute qualified dividend income.
Inflation Risk
Inflation risk is the risk that the value of assets or income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Fund’s shares and distributions can decline.
Deflation Risk
Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market
valuation of companies, their assets and revenues. In addition, deflation may have an adverse effect on the creditworthiness of
issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
|
Liberty All-Star® Equity Fund
|
Summary of Updated Information
Regarding the Fund
|
(Unaudited)
Market Disruption and Geopolitical Risk
Social, political, and economic events, such as natural disasters and health emergencies (e.g., epidemics and pandemics, such as
the recent COVID-19 outbreak), ongoing U.S military activities and political developments, as well as the threat of terrorist attacks,
could have significant adverse effects on the U.S. economy, the stock market, world economies and markets generally, and may lead
to volatility in the value of the Fund’s investments. These types of events may develop quickly and unexpectedly and could
significantly impact issuers, industries, governments and other systems, including financial markets. Global systems are increasingly
interconnected, and an event in one area of the world may have adverse effects in other economies and financial markets. It is
difficult to predict the timing or duration of an event, or its impact on the Fund and its shareholders.
Legislation and Regulatory Risk
Legislation or additional regulations may be enacted that could negatively affect the assets of the Fund or the issuers of such
assets. Changing approaches to regulation may have a negative impact on the entities and/or securities in which the Fund invests.
Legislation or regulation may also change the way in which the Fund itself is regulated.
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Annual Report | December 31, 2020
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65
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Liberty All-Star® Equity Fund
|
Privacy Policy
|
(Unaudited)
|
FACTS
|
WHAT DO THE LIBERTY ALL-STAR FUNDS DO WITH YOUR PERSONAL INFORMATION?
|
|
WHY?
|
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do.
|
|
WHAT?
|
The types of personal information we collect and share depend on the product or service you have with us. This information can include:
|
|
Social Security number
|
Purchase History
|
|
Assets
|
Account Balances
|
|
Retirement Assets
|
Account Transactions
|
|
Transaction History
|
Wire Transfer Instructions
|
|
Checking Account Information
|
|
|
When you are no longer our customer, we continue to share your information as described in this notice.
|
|
|
|
HOW?
|
All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons the Liberty All-Star Funds choose to share; and whether you can limit this sharing.
|
|
|
|
|
|
REASONS WE CAN SHARE YOUR PERSONAL INFORMATION
|
DO THE LIBERTY ALL-STAR FUNDS
SHARE?
|
CAN YOU LIMIT THIS SHARING?
|
|
For our everyday business purposes –
such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus
|
Yes
|
No
|
|
For our marketing purposes –
to offer our products and services to you
|
No
|
We don’t share
|
|
For joint marketing with other financial companies
|
No
|
We don’t share
|
|
For our affiliates’ everyday business purposes –
information about your transactions and experiences
|
No
|
We don’t share
|
|
For our affiliates’ everyday business purposes –
information about your creditworthiness
|
No
|
We don’t share
|
|
For non-affiliates to market to you
|
No
|
We don’t share
|
|
QUESTIONS?
|
Call 1-800-241-1850
|
|
Liberty All-Star® Equity Fund
|
Privacy Policy
|
(Unaudited)
|
WHO WE ARE
|
|
|
Who is providing this notice?
|
Liberty All-Star Funds
|
|
WHAT WE DO
|
|
|
How do the Liberty All-Star Funds protect my personal information?
|
To protect your personal information from unauthorized access
and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and
buildings.
Our service providers are held accountable for adhering
to strict policies and procedures to prevent any misuse of your nonpublic personal information.
|
|
How do the Liberty All-Star Funds collect my personal information?
|
We collect your personal information, for example,
when you
● Open
an account
● Provide
account information
● Give
us your contact information
● Make
deposits or withdrawals from your account
● Make
a wire transfer
● Tells
us who receives the money
● Tell
us where to send the money
● Show
your government-issued ID
● Show
your driver’s license
We also collect your personal information from other
companies.
|
|
Why can’t I limit all sharing?
|
Federal law gives you the right to limit only:
● Sharing for
affiliates’ everyday business purposes – information about your creditworthiness
● Affiliates from
using your information to market to you
● Sharing for
non-affiliates to market to you
State laws and individual companies may give you additional
rights to limit sharing.
|
|
DEFINITIONS
|
|
|
Affiliates
|
Companies related by common ownership or control. They
can be financial and nonfinancial companies.
● The Liberty
All-Star Funds do not share with our affiliates for marketing purposes.
|
|
Non-affiliates
|
Companies not related by common ownership or control.
They can be financial and nonfinancial companies.
● The Liberty
All-Star Funds do not share with non-affiliates so they can market to you.
|
|
Joint marketing
|
A formal agreement between non-affiliated financial
companies that together market financial products or services to you.
● The Liberty
All-Star Funds do not jointly market.
|
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Annual Report | December 31, 2020
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67
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Liberty All-Star® Equity Fund
|
Description of Lipper
Benchmark and Market Indices
|
(Unaudited)
Dow Jones Industrial Average
A price-weighted measure of 30 U.S. blue-chip companies.
Lipper Large-Cap Core Mutual Fund Average
The average of funds that, by portfolio practice, invest at
least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) above Lipper’s
U.S. domestic equity large-cap floor. These funds typically have average characteristics compared to the S&P 500® Index.
NASDAQ Composite Index
Measures all NASDAQ domestic and international based common
type stocks listed on the NASDAQ Stock Market.
Russell 1000® Growth Index
Measures the performance of those Russell 1000® companies
with lower book-to-price ratios and higher growth values. The Russell 1000® Index measures the performance of the 1,000 largest
companies in the Russell 3000® Index.
Russell 1000® Value Index
Measures the performance of those Russell 1000® companies
with higher book-to-price ratios and lower growth values. The Russell 1000® Index measures the performance of the 1,000 largest
companies in the Russell 3000® Index.
Russell 2000® Index
The Russell 2000® Index measures the performance of the
2,000 smallest companies in the Russell 3000® Index.
S&P 500® Index
A large-cap U.S. equities index that includes 500 leading companies
and captures approximately 80% coverage of available market capitalization.
An investor cannot invest directly in an index.
