UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4537
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Liberty All-Star Growth Fund, Inc.
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Vincent Pietropaolo, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3698
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Date of fiscal year end: 12/31/04
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Date of reporting period: 06/30/04
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Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC]
SECOND QUARTER REPORT - JUNE 30, 2004
[ALL STAR(R) GROWTH FUND LOGO]
Q2
MULTI-MANAGEMENT
[GRAPHIC]
CLOSED-END STRUCTURE
[GRAPHIC]
PROFESSIONAL MANAGEMENT
[GRAPHIC]
ACCESS TO LEADING INVESTMENT MANAGERS
[GRAPHIC]
ONGOING MONITORING AND REBALANCING
[GRAPHIC]
DISTRIBUTION POLICY
[GRAPHIC]
LIBERTY ALL-STAR GROWTH FUND
LIBERTY ALL-STAR GROWTH FUND, INC.
FUND STATISTICS AND PERFORMANCE 2ND QUARTER 2004 YEAR-TO-DATE
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Period End Net Asset Value (NAV) -- $6.31
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Period End Market Price -- $6.40
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Period End Premium -- 1.4%
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Distributions $0.16 $0.33
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Market Price Trading Range $6.01 to $7.58 $6.01 to $7.70
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Premium Range 1.3% to 13.7% 1.3% to 13.8%
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Shares Valued at NAV 1.0% 2.0%
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Shares Valued at NAV
with Dividends Reinvested 1.0% 2.0%
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Shares Valued at Market Price
with Dividends Reinvested (6.3)% (1.4)%
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Lipper Multi-Cap Growth
Mutual Fund Average 1.1% 3.7%
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Russell Growth Indices
Largecap 1.9% 2.7%
Midcap 1.1% 5.9%
Smallcap 0.1% 5.7%
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Nasdaq Composite Index 2.8% 2.4%
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Figures shown for the Fund and the Lipper Multi-Cap Growth Mutual Fund Average
are total returns, which include dividends, after deducting fund expenses.
Figures shown for the unmanaged Russell Indices and the Nasdaq Composite Index
are total returns, including income. Past performance cannot predict future
results.
ON THE COVER
THE PHOTOGRAPHS NEXT TO LADY LIBERTY SYMBOLIZE THE FUND'S UNIQUE ATTRIBUTES THAT
WERE DESCRIBED IN THE FUND'S 2003 ANNUAL REPORT.
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: JULY 2004
The stock market posted a modest advance during the second quarter, as the S&P
500 Index gained 1.7 percent and the Nasdaq rose 2.8 percent. For the first
half, the S&P 500 and the Nasdaq advanced 3.4 percent and 2.4 percent,
respectively.
Key growth indices were also flat to modestly ahead for the second quarter
and first half. Returns for the Russell growth indices are summarized in the
table on the facing page. Most notable is the fact that small and mid-cap growth
stocks outperformed large cap growth stocks by a considerable margin for the
half. If second quarter returns are any indicator, however, that may be
changing, as the large caps led the way in the most recent reporting period.
Overall, equity markets for the quarter took their cue from the prospect of
higher interest rates, rising oil prices, fears surrounding the handover of
power in Iraq and concerns over a slowdown in global economic growth. All
contributed to sluggishness in share prices. With this uncertainty as a
backdrop, energy stocks advanced, and financial stocks declined owing to
concerns over higher interest rates. Stocks have experienced a broad based
decline thus far in July as the market has failed to overcome the aforementioned
concerns.
On the positive side, the economy continued to expand and corporate
earnings continued to rise. During the quarter, the government reported a 4.4
percent rise in first quarter GDP, up from the solid 4.1 percent pace registered
in the fourth quarter of 2003. By the time all reports are in, year-over-year
second quarter corporate earnings are expected to be ahead by more than 20
percent for the fourth quarter in a row--a rare event.
Like the first quarter, Liberty All-Star Growth Fund returns were mixed for
the second quarter. With shares valued at net asset value with dividends
reinvested, the Fund gained 1.0 percent. This result was virtually in line with
the Fund's primary benchmark, the Lipper Multi-Cap Growth Mutual Fund Average,
which advanced 1.1 percent. The Fund's quarterly return also places it in the
mid-range of the three Russell growth indices summarized in the table. The
Fund's investment performance was generally acceptable, but an overweight to the
underperforming media industry proved a drag on overall results.
The one negative note for the quarter was a 6.3 percent decline in the
market value of Fund shares with dividends reinvested. We believe this was not
related to investment performance, but to the Fund's premium. During the
quarter, the premium
1
at which Fund shares traded over NAV reached a high of 13.7 percent which,
historically, was unsustainably high.
For the past year, lower quality stocks have outperformed higher quality
issues--a factor that has hampered the Fund's relative results. For the past
three years, however, the Fund ranks comfortably above median in the Lipper
Multi-Cap Growth Mutual Fund universe.
One encouraging sign to come out of the second quarter was a gradual but
ongoing rotation to higher quality stocks, an investment strategy pursued by the
Fund's large cap investment manager, William Blair & Company. We invite you to
read the interview with investment manager and one of the firm's principals,
John Jostrand, beginning on page 8.
On behalf of the entire team here at Liberty Asset Management Company, I
would like to thank shareholders for their ongoing support of the Fund. We
believe that the Fund is properly structured with a quality team of investment
managers, giving us confidence as we move into the future.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc.
2
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
[CHART]
THE FUND'S THREE GROWTH INVESTMENT MANAGERS
AND THE MARKET CAPITALIZATION ON WHICH EACH FOCUSES:
MID-CAP GROWTH LARGE-CAP GROWTH SMALL-CAP GROWTH
TCW INVESTMENT MANAGEMENT COMPANY WILLIAM BLAIR & COMPANY, L.L.C. M.A. WEATHERBIE & CO., INC.
Companies with competitive Companies that have demonstrated Companies with enduring competitive
advantages and superior consistently high rates of growth advantages and high, sustainable
business models that should and profitability. earnings growth.
result in rapidly growing
sales and earnings.
MANAGERS' DIFFERING INVESTMENT STYLES ARE
REFLECTED IN PORTFOLIO CHARACTERISTICS
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of
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 S&P/BARRA
SmallCap, MidCap and LargeCap Growth indices.
MARKET CAPITALIZATION SPECTRUM
SMALL LARGE
[GRAPHIC]
PORTFOLIO CHARACTERISTICS
AS OF JUNE 30, 2004 (UNAUDITED)
S&P/BARRA GROWTH:
-------------------------------------
SMALLCAP MIDCAP LARGECAP M.A. WILLIAM TOTAL
600 INDEX 400 INDEX 500 INDEX WEATHERBIE TCW BLAIR FUND
Number of Holdings 241 184 166 61 48 35 139*
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Weighted Average
Market Capitalization
(billions) $ 1.2 $ 3.5 $ 116.4 $ 2.3 $ 19.1 $ 56.2 $ 25.2
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Average Five-Year
Earnings Per Share
Growth 13% 13% 18% 16% 36% 17% 22%
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Dividend Yield 0.6% 0.8% 1.5% 0.3% 0.2% 0.8% 0.4%
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Price/Earnings
Ratio 23x 25x 25x 25x 37x 24x 27x
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Price/Book
Value Ratio 3.7x 4.1x 5.4x 4.3x 6.4x 5.4x 5.4x
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*Certain holdings are held by more than one manager.
3
INVESTMENT GROWTH AS OF JUNE 30, 2004
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the growth of a $10,000 investment assuming the
purchase of common stock at the closing market price (NYSE: ASG) of $9.25 on
December 31, 1996, and tracking its progress through June 30, 2004. This covers
the period since the Fund commenced its 10 percent distribution policy in 1997.
[CHART]
BOTTOM TOP
PLOT PLOT
POINTS POINTS
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31-Dec-96 $10,000.00 $ 0.00
31-Jan-97 $10,675.67 $ 0.01
28-Feb-97 $11,081.08 $ 0.01
31-Mar-97 $11,135.13 $ 4.12
30-Apr-97 $11,000.00 $ 0.01
31-May-97 $12,124.32 $ 9.59
30-Jun-97 $12,935.13 $ 55.29
31-Jul-97 $14,151.35 $ 123.84
31-Aug-97 $14,035.13 $ 96.96
30-Sep-97 $15,048.65 $ 181.80
31-Oct-97 $14,305.40 $ 119.58
30-Nov-97 $14,516.22 $ 147.10
31-Dec-97 $14,245.94 $ 116.58
31-Jan-98 $14,651.35 $ 162.36
28-Feb-98 $15,529.73 $ 261.53
31-Mar-98 $16,313.51 $ 346.16
30-Apr-98 $16,448.65 $ 365.28
31-May-98 $15,756.76 $ 280.97
30-Jun-98 $15,891.89 $ 304.62
31-Jul-98 $15,959.46 $ 591.87
31-Aug-98 $12,870.27 $ (41.10)
30-Sep-98 $13,681.08 $ 147.76
31-Oct-98 $14,356.76 $ 305.15
30-Nov-98 $14,894.59 $ 457.49
31-Dec-98 $15,164.86 $ 530.28
31-Jan-99 $15,029.73 $ 493.88
28-Feb-99 $14,827.03 $ 439.28
31-Mar-99 $14,621.62 $ 383.96
30-Apr-99 $14,689.19 $ 404.65
31-May-99 $14,967.57 $ 479.54
30-Jun-99 $15,441.08 $ 642.82
31-Jul-99 $15,440.54 $ 642.64
31-Aug-99 $14,537.84 $ 323.57
30-Sep-99 $14,605.40 $ 349.46
31-Oct-99 $14,943.24 $ 478.96
30-Nov-99 $14,737.84 $ 388.71
31-Dec-99 $15,818.92 $ 849.19
31-Jan-00 $15,481.08 $ 705.29
29-Feb-00 $15,413.51 $ 676.51
31-Mar-00 $16,367.57 $ 1,090.08
30-Apr-00 $16,232.43 $ 1,026.83
31-May-00 $15,913.51 $ 813.78
30-Jun-00 $17,670.27 $ 1,708.92
31-Jul-00 $17,197.30 $ 1,467.92
31-Aug-00 $18,600.00 $ 2,186.76
30-Sep-00 $18,464.86 $ 2,111.93
31-Oct-00 $17,924.32 $ 1,812.61
30-Nov-00 $16,186.49 $ 833.17
31-Dec-00 $15,781.08 $ 588.13
31-Jan-01 $16,972.97 $ 1,308.51
28-Feb-01 $16,345.94 $ 982.52
31-Mar-01 $15,145.94 $ 199.57
30-Apr-01 $16,302.70 $ 954.30
31-May-01 $16,843.24 $ 1,337.41
30-Jun-01 $16,486.49 $ 1,089.36
31-Jul-01 $16,659.46 $ 1,209.63
31-Aug-01 $15,318.92 $ 410.06
30-Sep-01 $13,772.97 $ (682.09)
31-Oct-01 $14,497.30 $ (126.00)
30-Nov-01 $15,405.40 $ 572.54
31-Dec-01 $15,578.38 $ 712.47
31-Jan-02 $15,762.16 $ 889.45
28-Feb-02 $15,329.73 $ 519.39
31-Mar-02 $16,108.11 $ 1,185.49
30-Apr-02 $15,362.16 $ 547.15
31-May-02 $15,189.19 $ 455.06
30-Jun-02 $14,075.67 $ (557.23)
31-Jul-02 $12,940.54 $(1,589.17)
31-Aug-02 $13,286.49 $(1,252.79)
30-Sep-02 $12,616.22 $(1,896.05)
31-Oct-02 $12,962.16 $(1,564.05)
30-Nov-02 $13,513.51 $(1,007.89)
31-Dec-02 $12,756.76 $(1,773.55)
31-Jan-03 $12,983.78 $(1,543.85)
28-Feb-03 $12,832.43 $(1,696.99)
31-Mar-03 $13,005.40 $(1,512.91)
30-Apr-03 $13,545.94 $ (937.68)
31-May-03 $14,054.05 $ (399.56)
30-Jun-03 $14,637.84 $ 249.67
31-Jul-03 $14,821.62 $ 454.07
31-Aug-03 $14,270.27 $ (178.39)
30-Sep-03 $14,454.05 $ 237.76
31-Oct-03 $15,016.22 $ 907.82
30-Nov-03 $15,178.38 $ 1,123.87
31-Dec-03 $15,308.11 $ 1,285.69
31-Jan-04 $15,870.27 $ 1,986.89
29-Feb-04 $15,783.78 $ 1,901.98
31-Mar-04 $15,686.49 $ 1,775.09
30-Apr-04 $15,783.78 $ 1,901.98
31-May-04 $15,200.00 $ 1,156.86
30-Jun-04 $15,200.00 $ 1,156.86
The dark green region of the graph above reflects the growth of the investment
assuming all distributions were received in cash and not reinvested back in the
Fund. The value of the investment under this scenario grew to $15,200 (this
value includes distributions per share totaling $7.66 during the period).
The light green region of the graph depicts additional value realized
through reinvestment of all distributions and participation in all the rights
offerings under the terms of each offering. On three occasions, the Fund has
conducted rights offerings that allowed shareholders to purchase additional
shares at a discount. The value of the investment under this scenario grew to
$16,357.
4
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS
RIGHTS OFFERINGS
----------------------------------------------
SHARES NEEDED
PER SHARE MONTH TO PURCHASE ONE SUBSCRIPTION
YEAR DISTRIBUTIONS COMPLETED ADDITIONAL SHARE PRICE
1997 $ 1.24
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1998 1.35 July 10 $ 12.41
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1999 1.23
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2000 1.34
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2001 0.92 September 8 6.64
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2002 0.67
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2003 0.58 September 8* 5.72
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2004
1st Quarter 0.17
2nd Quarter 0.16
----------------------------------------------------------------------------------
*The number of shares offered was increased by an additional 25% to cover a
portion of the over-subscription requests.
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy, in effect since 1997, is to
pay distributions on its shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES AND MAY BE TAXED AS ORDINARY INCOME UP TO THE AMOUNT OF
THE FUND'S CURRENT AND ACCUMULATED EARNINGS AND PROFITS. If, for any calendar
year, the total distributions made under the 10 percent pay-out policy exceed
the Fund's net investment income and net realized capital gains, the excess will
generally be treated as a non-taxable return of capital, reducing the
shareholder's adjusted basis in his or her shares. If the Fund's net investment
income and net realized capital gains for any year exceed the amount distributed
under the 10 percent pay-out policy, the Fund may, in its discretion, retain and
not distribute net realized capital gains and pay income tax thereon to the
extent of such excess.
5
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 6/30/04 OF 3/31/04 SECURITY NAME VALUE ($000) NET ASSETS
1 1 eBay, Inc. $ 5,324 3.3%
2 5 Yahoo! Inc. 4,469 2.8
3 4 Maxim Integrated Products, Inc. 3,837 2.4
4 2 Bed Bath & Beyond, Inc. 3,537 2.2
5 3 Xilinx, Inc. 3,221 2.0
6 6 Pfizer, Inc. 2,658 1.6
7 13 Fastenal Co. 2,443 1.5
8 8 EchoStar Communications Corp., Class A 2,380 1.5
9 11 First Data Corp. 2,377 1.5
10 9 Paychex, Inc. 2,334 1.4
11 10 Univision Communications, Inc., Class A 2,326 1.4
12 17 Dell, Inc. 2,296 1.4
13 40 Danaher Corp. 2,235 1.4
14 29 Amazon.com, Inc. 2,192 1.4
15 7 Westwood One, Inc. 2,113 1.3
16 14 SLM Corp. 2,071 1.3
17 16 National Instruments Corp. 2,070 1.3
18 32 Zebra Technologies Corp., Class A 2,055 1.3
19 12 Clear Channel Communications, Inc. 2,051 1.3
20 18 Juniper Networks, Inc. 2,029 1.3
21 30 UTI Worldwide, Inc. 2,017 1.2
22 20 Medtronic, Inc. 1,956 1.2
23 19 UnitedHealth Group, Inc. 1,920 1.2
24 31 ResMed, Inc. 1,919 1.2
25 21 Patterson Companies, Inc. 1,905 1.2
26 23 SAP AG 1,873 1.2
27 56 SunGard Data Systems, Inc. 1,849 1.1
28 27 Walgreen Co. 1,794 1.1
29 New Zimmer Holdings, Inc. 1,764 1.1
30 15 Getty Images, Inc. 1,728 1.1
31 45 Alcon, Inc. 1,636 1.0
32 39 Lincare Holdings, Inc. 1,634 1.0
33 26 Cognex Corp. 1,619 1.0
34 22 Cox Communications, Inc., Class A 1,617 1.0
35 51 The Corporate Executive Board Co. 1,604 1.0
36 24 State Street Corp. 1,599 1.0
37 33 IAC/InterActiveCorp 1,573 1.0
38 34 Education Management Corp. 1,546 1.0
39 25 Dollar Tree Stores, Inc. 1,452 0.9
40 44 International Speedway Corp., Class A 1,446 0.9
41 35 PepsiCo, Inc. 1,428 0.9
42 48 Eli Lilly and Co. 1,389 0.9
43 42 PolyMedica Corp. 1,346 0.8
44 52 Polycom, Inc. 1,345 0.8
45 New Research In Motion Ltd. 1,342 0.8
46 38 Fannie Mae 1,342 0.8
47 41 Taiwan Semiconductor Manufacturing Co., Ltd. 1,340 0.8
48 60 Harley-Davidson, Inc. 1,319 0.8
49 36 The Cheesecake Factory, Inc. 1,314 0.8
50 64 Microchip Technology, Inc. 1,304 0.8
6
MAJOR STOCK CHANGES IN THE SECOND QUARTER
The following are the major ($500,000 or more) stock changes--both purchases and
sales--that were made in the Fund's portfolio during the second quarter of 2004.
SHARES AS
SECURITY NAME PURCHASES (SALES) OF 6/30/04
PURCHASES
Danaher Corp. 11,300 43,100*
Red Hat, Inc. 31,000 31,000
Research In Motion Ltd. 19,600 19,600
SunGard Data Systems, Inc. 27,100 71,100
Zimmer Holdings, Inc. 20,000 20,000
SALES
Affymetrix, Inc. (21,000) 22,100
Avon Products, Inc. (15,800) 24,200*
Cisco Systems, Inc. (57,800) 0
eBay, Inc. (18,400) 57,900
Family Dollar Stores, Inc. (22,541) 8,332
Getty Images, Inc. (14,068) 28,800
MedImmune, Inc. (26,200) 0
*Adjusted for stock split
7
MANAGER INTERVIEW
[PHOTO OF JOHN F. JOSTRAND]
JOHN F. JOSTRAND
William Blair & Company, L.L.C.
AS THE ECONOMIC WINDS SHIFT, WILLIAM BLAIR & COMPANY SEES HIGHER QUALITY
STOCKS BENEFITING
WILLIAM BLAIR IS ONE OF LIBERTY ALL-STAR GROWTH FUND'S THREE INVESTMENT
MANAGERS. CHICAGO-BASED WILLIAM BLAIR IS A GROWTH STYLE MANAGER EMPHASIZING
DISCIPLINED, FUNDAMENTAL RESEARCH TO IDENTIFY QUALITY GROWTH COMPANIES WITH THE
ABILITY TO SUSTAIN THEIR GROWTH OVER A LONG PERIOD OF TIME. AT THE CORE OF THE
FIRM IS A TEAM OF ANALYSTS WHO PERFORM RESEARCH AIMED AT IDENTIFYING COMPANIES
THAT HAVE THE OPPORTUNITY TO GROW IN A SUSTAINABLE MANNER. RECENTLY, WE HAD THE
OPPORTUNITY TO TALK WITH PRINCIPAL AND PORTFOLIO MANAGER JOHN F. JOSTRAND, CFA.
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE PORTFOLIO MANAGER'S POSITION
AT THE TIME OF THE DISCUSSION (JULY 2004) AND ARE SUBJECT TO CHANGE.
LAMCOCO: In last year's market rally, smaller cap, lower quality stocks surged
ahead of larger cap, higher quality stocks--not entirely surprising after the
three-year bear market and historically low interest rates. At this stage in the
market cycle and the economic recovery, however, one would expect higher quality
issues to outperform. Have you found that to be true through the first half of
2004?
JOSTRAND: The early months of 2004 saw a continuation of the trends from 2003;
low interest rates and stocks with lower capitalizations and earnings quality
continuing to outperform through the first quarter. As the growth in earnings
and the economy were decelerating towards more sustainable growth rates, there
was growing evidence, particularly in the second quarter, that the market was
pivoting towards quality.
We recently completed a study of roughly 2,300 companies over a 15-year
period in which we sorted stocks into quintiles by beta--high beta to low beta.
The high beta, or lower quality stocks do very well in earnings recovery years.
That's when earnings explode off the bottom and rise dramatically, just as they
did in 2003. The study confirms, however, that the huge rebound in earnings
isn't sustainable. The economy either settles back to a more normalized rate of
growth or flattens out--sometimes even falling to recessionary levels. So, we
have three types of market environments: strong rebound, normal and
flat/recessionary. In the latter two environments, higher quality stocks
outperform, and the study confirms that quite persuasively.
LAMCO: Are second quarter earnings reports starting to provide hard evidence of
that, or is it too early to tell?
JOSTRAND: I think we're starting to pivot toward quality right now. To cite an
analogy, the wind was in the face of quality managers
8
all last year. For about four months this year, the wind shifted across our bow
and started coming at us sideways. Now, we think, the wind is continuing to
shift, and as we get into the second half of the year the wind will be at our
back, propelling us ahead.
LAMCO: What are two large cap, high quality growth stocks in the portion of the
All-Star Growth Fund portfolio that you manage that have done well through the
first half of 2004?
JOSTRAND: The stocks with the largest percentage gains in the six-month period
ending June 30, 2004, are Avon Products (+36 percent) and Harley-Davidson (+29
percent).
Avon is a company that we identified as an attractive candidate three years
ago due to financial restructuring, revitalization of the sales force (including
a new incentive compensation structure), and a growing presence in developing
markets such as Latin America, Eastern Europe and Asia. Avon's ability to
successfully sell its products outside of retail stores also affords better
pricing options and brand control than competitors who rely on stores for
distribution. Avon's ability to achieve strong unit growth and improve margins
has been developing over a period of time, but was ultimately recognized by the
market in the first half of this year.
Harley-Davidson's brand recognition and customer loyalty are among the
strongest anywhere, and unit sales continue to grow both in the U.S. and abroad.
The stock has been a core holding due to its continued unit growth and better
margins, owing to improved efficiencies and technological advances in
manufacturing automation.
LAMCO: There is a belief that the Federal Open Market Committee (FOMC) will
raise short-term interest rates three times for a total of 75 to 100 basis
points before the end of the year. In June, the FOMC raised rates 25 basis
points. Do you think that is likely to serve as a drag on the stock market, or
merely do its intended job, that is, to slow growth and temper inflation? Or, do
you feel there are other factors that are greater cause for concern, e.g., oil
prices, presidential election uncertainties and geopolitical tensions?
JOSTRAND: Due to the low level of short-term interest rates, the FOMC has
indicated a predisposition to raising rates to a more natural level--i.e., about
the level of the "core" inflation rate. All indications by the FOMC lead the
markets to believe there will be two to three additional 25-basis point
increases in short-term interest rates before year-end. At this point, Federal
Reserve Chairman Alan Greenspan has conducted what could be considered to be the
worst-kept secret, or the best choreographed economic maneuver: He has virtually
announced the FOMC's plans such that the market has time to digest these rate
increases well in advance.
Since the Fed actions will primarily affect rates at the short end of the
market, there is the possibility that longer-term rates may remain relatively
stable. If the Consumer Price Index (CPI) settles in at a growth rate
[SIDENOTE]
"...THE WIND WAS IN THE FACE OF QUALITY MANAGERS ALL LAST YEAR...NOW, THE WIND
IS CONTINUING TO SHIFT, AND AS WE GET INTO THE SECOND HALF...THE WIND WILL BE AT
OUR BACK..."
"WE CONTINUE TO FOCUS ON COMPANIES WITH SUSTAINABLE EARNINGS GROWTH THAT SHOULD
PERFORM WELL IN A MODESTLY EXPANDING ENVIRONMENT."
9
of two to three percent, then the long end of the yield curve will likely remain
at under 5.0 percent. This environment would imply a price-to-earnings (P/E)
ratio compression from 20x, where we were at the start of the year, to the
current multiple of approximately 17x. Now that P/E compression has occurred and
earnings are poised to achieve continued, albeit slower growth, the market could
finish the year stronger.
With respect to other factors in the market, the ongoing uncertainty in the
Middle East is causing energy-related stocks to continue to show strength, but
also to have a negative impact on CPI. Oil is a contributor to CPI and
geopolitical concerns are inflating the most recent CPI numbers. However, our
view is that core CPI (CPI minus the volatile food and energy components) is the
paramount gauge of inflation. At this point, the core CPI level does not concern
us.
The upcoming Presidential election is generating concerns about the
economic policies that may be adopted in the next administration. This
factor--combined with geopolitical concerns in the Middle East and rising
interest rates--is lending uncertainty to the financial markets, and it is
possible that unexpected changes could have an impact on overall market
direction.
We continue to focus on companies with sustainable earnings growth that
should perform well in a modestly expanding environment. Barring an
unpredictable economic shock, we would expect our stocks to benefit from a
moderate economic growth cycle.
LAMCO: In brief, what are the main points in the bull market case for continued
stock market strength?
JOSTRAND: The key to market growth is that inflation stabilizes at current
levels. The market has spent the year adjusting to the acceleration in CPI by
marking down P/E ratios. If the CPI stabilizes and we see an increase in capital
spending (resulting in new supply and, therefore, relief from price pressure),
the market is likely to settle into a multiple of 16 to 17x for an appropriate
P/E level.
In our own case as a high quality, large cap growth manager, I would go
back to my earlier analogy about the shifting wind. The shifting or rotating
wind puts pressure on low quality stocks. Why? Those companies tend to require
external financing--maybe they have money-losing operations that require outside
financing. When interest rates or inflation rise, it tends to put pressure on
P/E multiples, particularly for companies with the highest multiples.
Furthermore, as we finish the early phase of the recovery when earnings growth
is both surprising and unsustainable, we see high quality, durable growth return
to its normal prominence in investors' eyes.
LAMCO: Many thanks for the comments. It's sure to be an interesting second
half.
[SIDENOTE]
"...AS WE FINISH THE EARLY PHASE OF THE RECOVERY WHEN EARNINGS GROWTH IS
BOTH SURPRISING AND UNSUSTAINABLE, WE SEE HIGH QUALITY, DURABLE GROWTH RETURN TO
ITS NORMAL PROMINENCE..."
10
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004 (UNAUDITED)
COMMON STOCKS (98.6%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (23.8%)
AUTOMOBILES (0.8%)
Harley-Davidson, Inc. 21,300 $ 1,319,322
-------------
HOTELS, RESTAURANTS & LEISURE (2.6%)
The Cheesecake Factory, Inc. (a) 33,017 1,313,747
International Speedway Corp., Class A 29,726 1,445,873
Life Time Fitness, Inc. (a) 10,275 215,775
Outback Steakhouse, Inc. 12,274 507,653
P.F. Chang's China Bistro, Inc. (a) 19,077 785,019
-------------
4,268,067
-------------
INTERNET & CATALOG RETAIL (6.5%)
Amazon.com, Inc. (a) 40,300 2,192,320
eBay, Inc. (a) 57,900 5,323,905
IAC/InterActiveCorp (a) 52,181 1,572,735
Netflix, Inc. (a) 32,966 1,185,128
Orbitz, Inc., Class A (a) 10,326 223,248
-------------
10,497,336
-------------
MEDIA (8.8%)
Cablevision Systems Corp., Class A (a) 34,751 682,857
Carmike Cinemas, Inc. (a) 12,524 494,072
Citadel Broadcasting Co. (a) 8,200 119,474
Clear Channel Communications, Inc. 55,500 2,050,725
Cox Communications, Inc., Class A (a) 58,200 1,617,378
Cox Radio, Inc., Class A (a) 36,700 637,846
EchoStar Communications Corp., Class A (a) 77,400 2,380,050
Getty Images, Inc. (a) 28,800 1,728,000
Univision Communications, Inc., Class A (a) 72,840 2,325,781
Westwood One, Inc. (a) 88,770 2,112,726
-------------
14,148,909
-------------
MULTI-LINE RETAIL (2.4%)
Dollar Tree Stores, Inc. (a) 52,922 1,451,650
Family Dollar Stores, Inc. 8,332 253,459
Kohl's Corp. (a) 27,400 1,158,472
Wal-Mart Stores, Inc. 18,000 949,680
-------------
3,813,261
-------------
See Notes to Schedule of Investments.
11
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
SPECIALTY RETAIL (2.7%)
Bed Bath & Beyond, Inc. (a) 92,000 $ 3,537,400
The Children's Place Retail Stores, Inc. (a) 36,688 862,902
-------------
4,400,302
-------------
CONSUMER STAPLES (3.0%)
BEVERAGES (0.9%)
PepsiCo, Inc. 26,500 1,427,820
-------------
FOOD & STAPLES RETAILING (1.4%)
United Natural Foods, Inc. (a) 19,002 549,348
Walgreen Co. 49,550 1,794,206
-------------
2,343,554
-------------
PERSONAL PRODUCTS (0.7%)
Avon Products, Inc. 24,200 1,116,588
-------------
ENERGY (1.6%)
ENERGY EQUIPMENT & SERVICES (0.7%)
CARBO Ceramics, Inc. 8,446 576,440
Patterson-UTI Energy, Inc. (a) 17,317 578,561
-------------
1,155,001
-------------
OIL & GAS (0.9%)
Apache Corp. 11,000 479,050
Golar LNG Ltd. (a) 18,275 286,369
Suncor Energy, Inc. 27,200 696,592
-------------
1,462,011
-------------
FINANCIALS (7.6%)
CAPITAL MARKETS (3.1%)
Affiliated Managers Group, Inc. (a) 21,763 1,096,202
Investment Technology Group, Inc. (a) 32,200 411,838
SEI Investment Co. 21,000 609,840
State Street Corp. 32,600 1,598,704
T. Rowe Price Group, Inc. 24,600 1,239,840
-------------
4,956,424
-------------
CONSUMER FINANCE (1.3%)
SLM Corp. 51,200 2,071,040
-------------
See Notes to Schedule of Investments.
12
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
DIVERSIFIED FINANCIAL SERVICES (0.8%)
Financial Federal Corp. (a) 35,953 $ 1,267,703
-------------
INSURANCE (1.6%)
Brown & Brown, Inc. 19,778 852,432
Montpelier Re Holdings Ltd. 17,296 604,495
Platinum Underwriters Holdings Ltd. 17,324 527,169
XL Capital Ltd., Class A 8,800 664,048
-------------
2,648,144
-------------
THRIFTS & MORTGAGE FINANCE (0.8%)
Fannie Mae 18,800 1,341,568
-------------
HEALTH CARE (18.3%)
BIOTECHNOLOGY (4.5%)
Affymetrix, Inc. (a) 22,100 723,333
Amgen, Inc. (a) 22,200 1,211,454
Corgentech, Inc. (a) 13,900 224,068
Digene Corp. (a) 8,585 313,610
Enzon Pharmaceuticals, Inc. (a) 43,637 556,808
Genentech, Inc. (a) 23,200 1,303,840
Martek Biosciences Corp. (a) 15,911 893,721
Onyx Pharmaceuticals, Inc. (a) 7,100 300,756
Oscient Pharmaceuticals Corp. (a) 57,210 292,343
QLT, Inc. (a) 56,432 1,129,769
Vicuron Pharmaceuticals, Inc. (a) 24,700 310,232
-------------
7,259,934
-------------
HEALTH CARE EQUIPMENT & SUPPLIES (5.5%)
Alcon, Inc. 20,800 1,635,920
CardioDynamics International Corp. (a) 47,349 239,113
Medtronic, Inc. 40,150 1,956,108
PolyMedica Corp. 43,348 1,345,522
ResMed, Inc. (a) 37,655 1,918,899
Zimmer Holdings, Inc. (a) 20,000 1,764,000
-------------
8,859,562
-------------
See Notes to Schedule of Investments.
13
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
HEALTH CARE PROVIDERS & SERVICES (4.2%)
Express Scripts, Inc., Class A (a) 14,000 $ 1,109,220
Inveresk Research Group, Inc. (a) 9,602 296,126
Lincare Holdings, Inc. (a) 49,714 1,633,602
Patterson Companies, Inc. (a) 24,907 1,905,136
UnitedHealth Group, Inc. 30,840 1,919,790
-------------
6,863,874
-------------
PHARMACEUTICALS (4.1%)
Eli Lilly and Co. 19,875 1,389,461
Eon Labs, Inc. (a) 11,000 450,230
Medicis Pharmaceutical Corp., Class A 27,606 1,102,860
MGI Pharma, Inc. (a) 16,600 448,366
Nektar Therapeutics (a) 26,000 518,960
Pfizer, Inc. 77,530 2,657,728
-------------
6,567,605
-------------
INDUSTRIALS (9.8%)
AIR FREIGHT & LOGISTICS (1.2%)
UTI Worldwide, Inc. 38,285 2,017,237
-------------
COMMERCIAL SERVICES & SUPPLIES (4.7%)
Bright Horizons Family Solutions, Inc. (a) 12,004 643,535
Cintas Corp. 19,857 946,583
The Corporate Executive Board Co. 27,749 1,603,615
Education Management Corp. (a) 47,062 1,546,457
Robert Half International, Inc. 26,200 779,974
Universal Technical Institute, Inc. (a) 26,824 1,072,155
West Corp. (a) 39,189 1,024,792
-------------
7,617,111
-------------
CONSTRUCTION & ENGINEERING (0.2%)
Chicago Bridge & Iron Co., N.V 10,607 295,405
-------------
INDUSTRIAL CONGLOMERATES (0.8%)
General Electric Co. 38,000 1,231,200
-------------
See Notes to Schedule of Investments.
14
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MACHINERY (1.4%)
Danaher Corp. 43,100 $ 2,234,735
-------------
TRADING COMPANIES & DISTRIBUTORS (1.5%)
Fastenal Co. 42,980 2,442,553
-------------
INFORMATION TECHNOLOGY (32.6%)
COMMUNICATIONS EQUIPMENT (3.9%)
Avocent Corp. (a) 8,142 299,137
CIENA Corp. (a) 112,200 417,384
Ixia (a) 29,432 289,611
Juniper Networks, Inc. (a) 82,600 2,029,482
Packeteer, Inc. (a) 38,948 629,010
Polycom, Inc. (a) 60,023 1,345,115
Research In Motion Ltd. (a) 19,600 1,341,620
-------------
6,351,359
-------------
COMPUTERS & PERIPHERALS (2.6%)
Dell, Inc. (a) 64,100 2,296,062
EMC Corp. (a) 78,700 897,180
Network Appliance, Inc. (a) 49,100 1,057,123
-------------
4,250,365
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.3%)
Cognex Corp. 42,063 1,618,584
National Instruments Corp. 67,532 2,069,856
-------------
3,688,440
-------------
INTERNET SOFTWARE & SERVICES (4.0%)
Opsware, Inc. (a) 73,300 580,536
Retek, Inc. (a) 34,602 212,456
WebEx Communications, Inc. (a) 51,703 1,125,057
Yahoo! Inc. (a) 123,000 4,468,590
-------------
6,386,639
-------------
See Notes to Schedule of Investments.
15
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
IT SERVICES (5.4%)
CheckFree Corp. (a) 19,200 $ 576,000
First Data Corp. 53,400 2,377,368
Forrester Research, Inc. (a) 15,493 288,944
Paychex, Inc. 68,900 2,334,332
SRA International, Inc. (a) 28,753 1,216,827
SunGard Data Systems, Inc. (a) 71,100 1,848,600
-------------
8,642,071
-------------
OFFICE ELECTRONICS (1.3%)
Zebra Technologies Corp., Class A (a) 23,618 2,054,766
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (9.2%)
Altera Corp. (a) 32,500 722,150
Applied Micro Circuits Corp. (a) 72,300 384,636
Intersil Corp., Class A 20,956 453,907
Linear Technology Corp. 32,350 1,276,855
Maxim Integrated Products, Inc. 73,200 3,837,144
Microchip Technology, Inc. 41,351 1,304,211
Mindspeed Technologies, Inc. (a) 53,100 263,376
Novellus Systems, Inc. (a) 17,500 550,200
Power Integrations, Inc. (a) 19,136 476,486
Semtech Corp. (a) 35,593 837,859
SiRF Technology Holdings, Inc. (a) 18,500 241,795
Taiwan Semiconductor Manufacturing Co., Ltd. (a)(b) 161,204 1,339,608
Xilinx, Inc. 96,700 3,221,077
-------------
14,909,304
-------------
SOFTWARE (3.9%)
Agile Software Corp. (a) 54,100 473,375
BEA Systems, Inc. (a) 82,700 679,794
E.piphany, Inc. (a) 47,876 231,241
Interwoven, Inc. (a) 20,192 203,939
Intuit, Inc. (a) 27,500 1,060,950
Red Hat, Inc. (a) 31,000 712,070
See Notes to Schedule of Investments.
16
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
SOFTWARE (CONTINUED)
SAP AG (b) 44,800 $ 1,873,088
Salesforce.com, Inc. (a) 3,800 61,066
Siebel Systems, Inc. (a) 100,600 1,074,408
-------------
6,369,931
-------------
MATERIALS (0.8%)
CHEMICALS (0.8%)
Ecolab, Inc. 38,500 1,220,450
-------------
TELECOMMUNICATION SERVICES (1.1%)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.6%)
Sprint Corp. 37,500 660,000
Time Warner Telecom, Inc. (a) 93,800 393,022
-------------
1,053,022
-------------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
@Road, Inc. (a) 14,255 109,051
Telephone and Data Systems, Inc. 8,800 626,560
-------------
735,611
-------------
TOTAL COMMON STOCKS (COST OF $141,844,016) 159,288,224
-------------
WARRANTS (0.1%) UNITS
CONSUMER DISCRETIONARY (0.1%)
INTERNET & CATALOG RETAIL (0.1%)
IAC/InterActiveCorp, Expires 02/04/09 (a)
(Cost of $20,691) 2,918 100,292
-------------
See Notes to Schedule of Investments.
17
SHORT-TERM INVESTMENT (2.0%) PAR VALUE MARKET VALUE
REPURCHASE AGREEMENT (2.0%)
Repurchase agreement with State Street Bank & Trust Co.,
dated 06/30/04, due 07/01/04 at 1.17%, collateralized by
a U.S. Treasury Bond maturing 02/15/27, market value
$3,301,058 (repurchase proceeds $3,223,105)
(Cost of $3,223,000) $ 3,223,000 $ 3,223,000
-------------
TOTAL INVESTMENTS (100.7%) (COST OF $145,087,707)(c) 162,611,516
-------------
OTHER ASSETS AND LIABILITIES, NET (-0.7%) (1,145,394)
-------------
NET ASSETS (100.0%) $ 161,466,122
-------------
NET ASSET VALUE PER SHARE (25,607,642 SHARES OUTSTANDING) $ 6.31
-------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing.
(b) Represents an American Depositary Receipt.
(c) Cost of investments for both financial statements and federal income tax
purposes is the same.
Gross unrealized appreciation and depreciation
of investments at June 30, 2004 is as follows:
Gross unrealized appreciation $ 37,259,653
Gross unrealized depreciation (19,735,844)
-------------
Net unrealized appreciation $ 17,523,809
=============
See Notes to Financial Statements.
18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2004 (UNAUDITED)
ASSETS:
Investments at market value (identified cost $145,087,707) $ 162,611,516
Cash 2,327
Receivable for investments sold 1,788,078
Dividends and interest receivable 49,631
Foreign tax reclaim 3,226
-------------
TOTAL ASSETS 164,454,778
-------------
LIABILITIES:
Payable for investments purchased 2,557,931
Investment advisory, administrative and bookkeeping/pricing
fees payable 409,261
Accrued expenses 17,812
Other liabilities 3,652
-------------
TOTAL LIABILITIES 2,988,656
-------------
NET ASSETS $ 161,466,122
=============
NET ASSETS REPRESENTED BY:
Paid-in capital (authorized 60,000,000 shares at $0.10 Par;
25,607,642 shares outstanding) $ 160,941,973
Accumulated net investment loss (676,547)
Accumulated net realized loss on investments (16,323,113)
Net unrealized appreciation on investments 17,523,809
-------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF COMMON STOCK ($6.31 PER SHARE) $ 161,466,122
=============
See Notes to Financial Statements.
19
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
INVESTMENT INCOME:
Dividends $ 351,839
Interest 11,376
-------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $7,830) 363,215
EXPENSES:
Investment advisory fee $ 642,756
Administrative fee 160,656
Bookkeeping and pricing fees 25,448
Custodian fees 11,338
Transfer agent fees 56,782
Shareholder communication expenses 69,715
Directors' fees and expenses 15,463
NYSE fee 19,829
Miscellaneous expense 37,841
-------------
TOTAL EXPENSES 1,039,828
-------------
CUSTODY EARNINGS CREDIT (66)
-------------
NET EXPENSES 1,039,762
-------------
NET INVESTMENT LOSS (676,547)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 28,093,895
Cost of investments sold 18,454,588
-------------
Net realized gain on investment transactions 9,639,307
Net unrealized appreciation on investments:
Beginning of period 23,502,837
End of period 17,523,809
-------------
Change in unrealized appreciation-net (5,979,028)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,983,732
=============
See Notes to Financial Statements.
20
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31,
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) 2003
OPERATIONS:
Net investment loss $ (676,547) $ (1,229,500)
Net realized gain on investment transactions 9,639,307 7,575,247
Change in unrealized appreciation
(depreciation)-net (5,979,028) 31,904,250
------------- -------------
Net increase in net assets resulting from operations 2,983,732 38,249,997
------------- -------------
DISTRIBUTIONS DECLARED FROM:
Net realized gain on investments (8,300,269) (7,098,747)
Paid-in capital -- (5,634,283)
------------- -------------
Total distributions (8,300,269) (12,733,030)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering -- 18,754,401
Dividend reinvestments 3,877,679 6,412,884
------------- -------------
Increase in net assets from capital share transactions 3,877,679 25,167,285
------------- -------------
Total increase (decrease) in net assets (1,438,858) 50,684,252
NET ASSETS:
Beginning of period 162,904,980 112,220,728
------------- -------------
End of period (including accumulated net
investment loss of $676,547 and $0, respectively) $ 161,466,122 $ 162,904,980
============= =============
See Notes to Financial Statements.
21
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 ----------------------------------
(UNAUDITED) 2003 2002 2001
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 6.51 $ 5.44 $ 8.31 $ 10.86
-------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.03) (0.06) (0.07) (0.09)
Net realized and unrealized gain
(loss) on investments 0.16 1.79 (2.13) (1.50)
-------- -------- -------- --------
Total from Investment Operations 0.13 1.73 (2.20) (1.59)
-------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- --
Paid-in capital -- (0.26) (0.67) (0.92)
Realized capital gain (0.33) (0.32) -- --
In excess of realized capital gain -- -- -- --
-------- -------- -------- --------
Total Distributions (0.33) (0.58) (0.67) (0.92)
-------- -------- -------- --------
Change due to rights offering (a) -- (0.08) -- (0.04)
Impact of shares issued
in dividend reinvestment (b) -- -- -- --
-------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (0.33) (0.66) (0.67) (0.96)
-------- -------- -------- --------
Net asset value at end of period $ 6.31 $ 6.51 $ 5.44 $ 8.31
======== ======== ======== ========
Market price at end of period $ 6.40 $ 6.83 $ 5.05 $ 8.33
======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR
SHAREHOLDERS: (c)
Based on net asset value 2.0%(d) 33.7% (27.2)% (13.7)%
Based on market price (1.4)%(d) 51.1% (32.6)% (0.5)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 161 $ 163 $ 112 $ 163
Ratio of expenses to average net
assets (e) 1.29%(f) 1.34% 1.38% 1.41%
Ratio of net investment income (loss)
to average net assets (e) (0.84)%(f) (0.94)% (1.07)% (1.12)%
Portfolio turnover rate 14%(d) 37% 25% 41%
(a) Effect of Fund's rights offerings for shares at a price below net asset
value.
(b) Effect of payment of a portion of distributions in newly issued shares at
a discount from net asset value.
(c) Calculated assuming all distributions reinvested at actual reinvestment
price and all rights offerings were fully subscribed under the terms of
each offering.
(d) Not annualized.
See Notes to Financial Statements.
22
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995(g) 1994
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 13.44 $ 13.03 $ 12.89 $ 11.27 $ 10.55 $ 9.95 $ 10.54
-------- -------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.09) (0.05) (0.03) (0.02) 0.01 0.31 0.23
Net realized and unrealized gain
(loss) on investments (1.15) 1.83 1.73 2.88 1.86 1.05 (0.24)
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations (1.24) 1.78 1.70 2.86 1.87 1.36 (0.01)
-------- -------- -------- -------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- -- (0.01) (0.31) (0.23)
Paid-in capital (0.05) -- (0.83) -- -- -- --
Realized capital gain (1.22) (1.23) (0.52) (1.24) (1.01) (0.45) (0.35)
In excess of realized capital gain (0.07) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions (1.34) (1.23) (1.35) (1.24) (1.02) (0.76) (0.58)
-------- -------- -------- -------- -------- -------- --------
Change due to rights offering (a) -- -- (0.21) -- -- -- --
Impact of shares issued
in dividend reinvestment (b) -- (0.14) -- -- (0.13) -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (1.34) (1.37) (1.56) (1.24) (1.15) (0.76) (0.58)
-------- -------- -------- -------- -------- -------- --------
Net asset value at end of period $ 10.86 $ 13.44 $ 13.03 $ 12.89 $ 11.27 $ 10.55 $ 9.95
======== ======== ======== ======== ======== ======== ========
Market price at end of period $ 9.438 $ 10.813 $ 11.438 $ 11.938 $ 9.250 $ 9.375 $ 8.500
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR
SHAREHOLDERS: (c)
Based on net asset value (9.1)% 15.9% 15.3% 27.3% 18.3% 14.6% 0.5%
Based on market price (1.8)% 6.2% 9.3% 43.6% 9.3% 19.3% (11.7)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 180 $ 219 $ 199 $ 167 $ 137 $ 120 $ 113
Ratio of expenses to average net
assets (e) 1.21% 1.20% 1.22% 1.20% 1.35% 1.42% 1.51%
Ratio of net investment income (loss)
to average net assets (e) (0.71)% (0.37)% (0.22)% (0.18)% 0.06% 2.87% 2.12%
Portfolio turnover rate 62% 71% 33% 57% 51% 82% 50%
(e) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(f) Annualized.
(g) Liberty Asset Management Company assumed complete management
responsibilities of the Fund in November 1995.
See Notes to Financial Statements.
23
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED)
I. ORGANIZATION
Liberty All-Star Growth Fund, Inc. (the "Fund") is a Maryland corporation
registered under the Investment Company Act of 1940 (the "Act"), as amended, as
a diversified, closed-end management investment company.
INVESTMENT GOAL
The Fund seeks long-term capital appreciation.
FUND SHARES
The Fund may issue 60,000,000 shares of common stock at $0.10 par.
II. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
SECURITY VALUATION
Equity securities are valued at the last sale price at the close of the
principal exchange on which they trade. Unlisted securities or listed securities
for which there were no sales during the day are valued at the closing bid price
on such exchanges or over-the-counter markets.
Short-term debt obligations maturing in more than 60 days for which market
quotations are readily available are valued at current market value. Short-term
debt obligations maturing within 60 days are valued at amortized cost, which
approximates market value.
Investments for which market quotations are not readily available are
valued at fair value as determined in good faith under consistently applied
procedures approved by and under the general supervision of the Board of
Directors.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is determined
and gains (losses) are based upon the specific identification method for both
financial statement and federal income tax purposes.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment advisor has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis. Corporate actions and dividend
income are recorded on the ex-date.
FEDERAL INCOME TAX STATUS
Consistent with the Fund's policy to qualify as a regulated investment company
and to distribute all of its taxable income to shareholders, no federal income
tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund currently has a policy of paying
24
distributions on its common shares 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.
III. FEDERAL TAX INFORMATION
The tax character of distributions paid during the year ended December 31, 2003
was as follows:
Distributions paid from:
Ordinary income* $ 7,098,737
Long-term capital gain --
-------------
7,098,737
Return of capital 4,528,603
-------------
$ 11,627,340
*For tax purposes short-term capital gains distributions, if any, are considered
ordinary income distributions.
The following capital loss carryforwards, determined as of December 31,
2003, may be available to reduce taxable income arising from future net realized
gains on investments, if any, to the extent permitted by the Internal Revenue
Code:
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
---------- ------------
2009 $ 5,781,653
2010 11,242,729
--------------
$ 17,024,382
Future realized gains offset by the loss carryforwards are not required to be
distributed to shareholders. However, under the Fund's distribution policy, as
described above, such gains may be distributed to shareholders in the year gains
are realized. Any such gains distributed may be taxable to shareholders as
ordinary income.
IV. FEES AND COMPENSATION PAID TO AFFILIATES
Liberty Asset Management Company ("LAMCO"), an indirect, wholly owned subsidiary
of Bank of America Corporation ("BOA"), is the investment advisor of the Fund.
Prior to April 1, 2004, LAMCO was an indirect, wholly owned subsidiary of
FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004,
FleetBoston, including the Fund's investment advisor, was acquired by BOA. The
acquisition did not change the way the Fund is managed, the investment personnel
assigned to manage the Fund or the fees paid by the Fund.
INVESTMENT ADVISORY FEE
LAMCO receives a quarterly investment advisory fee based on the Fund's average
weekly net assets at the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.80%
Over $300 million 0.72%
Under Portfolio Manager Agreements, LAMCO pays each Portfolio Manager a
portfolio management fee based on the assets of the investment portfolio that
they manage. The portfolio management fee is paid from the investment advisory
fees collected by LAMCO and is based on the Fund's average weekly net assets at
the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.40%
Over $300 million 0.36%
ADMINISTRATION FEE
LAMCO provides administrative and other services for a quarterly fee based on
the Fund's average weekly net assets at the following annual rates:
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.20%
Over $300 million 0.18%
25
PRICING AND BOOKKEEPING FEES
Columbia Management Advisors, Inc. ("Columbia"), an indirect, wholly owned
subsidiary of BOA and an affiliate of LAMCO, is responsible for providing
pricing and bookkeeping services to the Fund under a pricing and bookkeeping
agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia
has delegated those functions to State Street Corporation ("State Street").
Columbia pays the total fees collected from the Fund for these services to State
Street under the Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, Columbia
receives from the Fund an annual flat fee of $10,000 paid monthly, and in any
month that the Fund's average weekly net assets exceed $50 million, an
additional monthly fee. The additional fee rate is calculated by taking into
account the fees payable to State Street under the Outsourcing Agreement. This
rate is applied to the average daily net assets of the Fund for that month. The
Fund also pays additional fees for pricing services. For the six months ended
June 30, 2004, the annualized effective pricing and bookkeeping fee rate was
0.032%.
CUSTODY CREDITS
The Fund has an agreement with its custodian bank under which custody fees may
be reduced by balance credits. The Fund could have invested a portion of the
assets utilized in connection with the expense offset arrangement in an income
producing asset if it had not entered into such an agreement.
FEES PAID TO OFFICERS
The Fund pays no compensation to its officers, all of whom are employees of
LAMCO or its affiliates.
OTHER
Columbia provides certain services to the Fund related to Sarbanes-Oxley
compliance. For the six months ended June 30, 2004, the Fund paid $1,506 to
Columbia for such services. This amount is included in "Miscellaneous expense"
on the Statement of Operations.
V. PORTFOLIO INFORMATION
PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 2004, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $22,743,513 and
$28,093,895, respectively.
VI. CAPITAL TRANSACTIONS
In a rights offering commencing August 12, 2003, shareholders exercised rights
to purchase 3,305,213 shares at $5.72 per share for proceeds, net of expenses,
of $18,754,401. During the six months ended June 30, 2004, and the year ended
December 31, 2003, distributions in the amount of $3,877,679 and $6,412,884,
respectively, were paid in newly issued shares valued at market value or net
asset value, but not less than 95% of market value. Such distributions resulted
in the issuance of 600,317 and 1,083,624 shares, respectively.
26
DIVIDEND REINVESTMENT PLAN
Each registered shareholder of the Fund will automatically be a participant in
the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan unless the
shareholder specifically elects otherwise by writing to the Plan Agent,
EquiServe Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010 or by
calling 1-800-LIB-FUND (1-800-542-3863).
If your shares are held for you by a broker, bank or other nominee, you
should contact the institution holding your shares as to whether or not you wish
to participate in the Plan. Participants in the Plan have their dividends
automatically reinvested in additional shares of the Fund, and are kept apprised
of the status of their account through quarterly statements.
27
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
On April 30, 2004, the Annual Meeting of Shareholders of the Fund was held to
elect one (1) Director. On March 10, 2004, the record date for the Meeting, the
Fund had outstanding 25,007,328 shares of common stock. The votes cast at the
Meeting were as follows:
1. PROPOSAL TO ELECT ONE (1) DIRECTOR:
FOR WITHHELD
--- --------
Richard W. Lowry 22,970,853 405,463
The Board of Directors is divided into the following three classes, each
with a term expiring in the indicated year:
2005 2006 2007
---- ---- ----
John A. Benning James E. Grinnell Richard W. Lowry
William E. Mayer John J. Neuhauser
28
[ALL-STAR(R) GROWTH FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43010, Providence, Rhode Island 02940-3010
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
DIRECTORS
John A. Benning*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
Fred H. Wofford, Vice President
J. Kevin Connaughton, Treasurer
Michael G. Clarke, Controller
Vicki L. Benjamin, Chief Accounting Officer
David A. Rozenson, Secretary
*Member of the audit committee.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to its portfolio securities is available (1) without
charge, upon request, by calling 1-800-542-3863 or (2) on the Securities and
Exchange Commission's web site at www.sec.gov.
COVER IMAGE OF THE NEW YORK STOCK EXCHANGE TRADING FLOOR USED WITH PERMISSION OF
NYSE.
ASG
LISTED
NYSE
[ALL-STAR(R) GROWTH FUND LOGO]
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
ASG
LISTED
NYSE
A MEMBER OF THE
[CLOSED-END FUND ASSOCIATION, INC. LOGO]
WWW.CLOSED-ENDFUNDS.COM
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable at this time.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the six month period ended June 30, 2004, there were no purchases made by
or on behalf of the registrant or any "affiliated purchaser," as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934 ("Exchange Act"), of
shares or other units of any class of the registrant's equity securities that
are registered by the registrant pursuant to Section 12 of the Exchange Act.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have not been any material changes to the procedures by which shareholders
may recommend nominees to the registrant's Board of Trustees/Directors since
those procedures were last disclosed in response to Item 7(d)(2)(ii)(G) of
Schedule 14A.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer, based on their evaluation of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing of
this report, have concluded that such controls and procedures are
adequately designed to ensure that information required to be
disclosed by the registrant in Form N-CSR is accumulated and
communicated to the registrant's management, including the principal
executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR: Not
applicable at this time.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) LIBERTY ALL-STAR GROWTH FUND, INC.
By (Signature and Title) /s/ William R. Parmentier
--------------------------------------------------------
William R. Parmentier, Jr., President
Date September 2, 2004
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ William R. Parmentier
--------------------------------------------------------
William R. Parmentier, Jr., President
Date September 2, 2004
----------------------------------------------------------------------------
By (Signature and Title) /s/ J. Kevin Connaughton
--------------------------------------------------------
J. Kevin Connaughton, Treasurer
Date September 2, 2004
----------------------------------------------------------------------------