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 No.: 811-04809

Liberty All-Star Equity Fund 

(Exact name of registrant as specified in charter)

1290 Broadway, Suite 1000, Denver, Colorado 80203 

(Address of principal executive offices) (Zip code)

Sareena Khwaja-Dixon, Esq. 

ALPS Fund Services, Inc. 

1290 Broadway, Suite 1000 

Denver, Colorado 80203 

(Name and address of agent for service)

Registrant’s telephone number, including area code: 303-623-2577

Date of fiscal year end: December 31

Date of reporting period: January 1, 2022 - December 31, 2022

Item 1. Report of Shareholders.

Contents

A SINGLE INVESTMENT...

A DIVERSIFIED CORE PORTFOLIO

A single fund that offers:

LIBERTY ALL-STAR^® EQUITY FUND

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Negative macro forces overwhelmed generally good corporate and economic performance to propel equities downward in 2022. The sharpest increase in inflation in 40 years compelled the Federal Reserve to raise short-term interest rates seven times. The war in Ukraine unsettled the geopolitical environment and drove energy and agricultural commodity prices higher. The Chinese government’s strict response to the COVID pandemic disrupted global supply chains. In addition, fears of an outright recession in 2023 meant investors lacked conviction and remained cautious.

In the U.S., solid corporate earnings, strong employment and wage gains, and ample consumer spending—ordinarily factors that would support good outcomes in the equity market—were not enough to stem the tide. At times, investors interpreted good news as bad news when viewed through the lens of higher costs and rising interest rates.

By year end, the outcome for the S&P 500^® Index was a return of -18.11 percent, a middle ground bracketed by a -6.86 percent return for the Dow Jones Industrial Average (DJIA) and for the NASDAQ Composite Index—populated by many high growth companies that are negatively impacted by rising interest rates—a return of -32.54 percent. Among the 11 sectors comprising the S&P 500^®, all but energy and utilities posted declines for the year (energy was up 66.23 percent while utilities gained just 1.40 percent). The laggards were communication services (-40.25 percent), consumer discretionary (-37.07 percent), information technology (-27.96 percent) and real estate (-26.33 percent).

Although 2022 returns were the poorest in 14 years, the results did not equal the slides experienced in the two most recent bear markets. In the bursting of the dotcom bubble, the S&P 500^® declined 11.89 percent in 2001 and 22.10 percent in 2002 while in the 2008 financial crisis and great recession the index gave up 37.00 percent.

A factor that tended to moderate losses for stocks in 2022: the occasional rallies that materialized quickly only to fade away. For instance, the S&P 500^® was down as much as 12.26 percent in the first quarter but clawed back some of its losses on the strength of a 3.71 percent gain in March. Similar rallies occurred over the summer—in July, the S&P 500^® had its best month since November 2020. Expectations that the Federal Reserve would begin to back off its rate hike regime boosted stocks in the fourth quarter. The S&P 500^® advanced 7.56 percent and the DJIA rose a strong 16.01 percent; the NASDAQ Composite was negative but only down 0.79 percent. Consistent with the prevailing pattern, however, December ended the year by closing with losses.

Value stocks outperformed their growth style counterparts for the year. The broad market Russell 3000^® Value Index returned -7.98 percent versus -28.97 percent for its growth counterpart (both were positive in the fourth quarter, the former returning 12.18 percent versus 2.31 percent for the latter). On a relative basis, value stocks maintained their return edge across the large-, mid- and small-cap spectrum (although all were negative for the year).

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Liberty All-Star^® Equity Fund

Liberty All-Star Equity Fund underperformed for the year but rebounded with positive relative results in the final quarter. For the full year, the Fund returned -20.11 percent when shares are valued at net asset value (NAV) with dividends reinvested and -24.48 percent when shares are valued at market price with dividends reinvested. (Fund returns are net of expenses.) Both measures of Fund return trailed the -18.21 percent return of its primary benchmark, the Lipper Large-Cap Core Mutual Fund Average. The Fund’s returns lagged the -18.11 percent return of the S&P 500^® and the -6.86 percent return of the DJIA but were ahead of the NASDAQ Composite.

In the fourth quarter, the Fund returned 9.62 percent when shares are valued at NAV with dividends reinvested and 5.71 percent when shares are valued at market price with dividends reinvested. The NAV return topped the 8.07 percent return of the Lipper Large-Cap Core benchmark as well as the returns of the S&P 500^® Index and the NASDAQ Composite while trailing the strong 16.01 percent return turned in by the DJIA.

Stock selection and a narrow market hurt the Fund’s NAV performance at times during the year. While the two growth style managers encountered the resistance met by growth stocks generally throughout 2022, the Fund’s three value managers were not able to offset the shortfall. As to the Fund’s market price return, it lagged as, in general, premiums declined and discounts widened in the closed-end fund industry. The Fund was not immune to this trend as it traded at a premium to NAV of 2.2 percent at year end 2021, compared to a 3.4 percent discount at the close of 2022.

In accordance with the Fund’s distribution policy, the Fund paid a distribution of $0.15 per share in the fourth quarter. The Fund’s distribution policy has been in place since 1988 and is a major component of the Fund’s total return. The Fund has paid distributions of $29.68 per share for a total of more than $3.5 billion since 1987 (the Fund’s first full calendar year of operations). We continue to emphasize that shareholders should include these distributions when determining the total return on their investment in the Fund.

We traditionally use the opportunity afforded by the annual report to offer shareholders comments and analysis from the Fund’s three value managers and two growth managers. This year’s Roundtable offers thoughts about 2022 as well as insights into the managers’ strategy and thinking. We invite shareholders to read this informative Q&A, which begins on page 13.

Turning to Fund news, after a 40-year career in investment management I will be retiring and, therefore, will step down as President of the Fund during the first quarter of 2023. My tenure as President began 24 years ago in April 1999. Throughout this period, I have always given my very best on behalf of Fund shareholders and have had the privilege of working with a highly capable and dedicated team of professionals here at ALPS Advisors. Two of our greatest strengths have been experience and continuity, and those attributes are evident once again as Mark Haley succeeds me as President. Mark’s tenure actually predates mine, as he has served the Fund since 1994, most recently as Senior Vice President. Having worked with Mark throughout these years, I am confident he will be an effective leader and advocate for shareholders’ best interests. Also, a recent staff addition, Robert Milas, was appointed Vice President of the Fund in December and will be working closely with Mark and the entire investment team.

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I would much prefer to sign my final shareholder letter by reporting strong performance in the equity markets. That was not to be in 2022. Over my tenure, however, we have experienced other difficult periods, principally the aforementioned bursting of the dotcom bubble in 2001 and the financial crisis of 2007 – 2009. Inflation, rising interest rates and geopolitical conflict thrust 2022 into that category. The Fund is not immune to such challenging periods, but on balance its focus on core principles and long-term investment objectives has been validated. I am confident shareholders will be well served in the future, and I am grateful for your support during my years with the Fund.

Sincerely,

William R. Parmentier, Jr.

President

Liberty All-Star^® Equity Fund

The views expressed in the President’s Letter, Unique Fund Attributes and Manager Roundtable reflect the current views of the respective parties. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions, and the respective parties disclaim any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent. References to specific company securities should not be construed as a recommendation or investment advice.

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FUND STATISTICS AND SHORT-TERM PERFORMANCE

PERIODS ENDED DECEMBER 31, 2022

FUND STATISTICS:

PERFORMANCE:

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

The returns shown for the Lipper Large-Cap Core Mutual Fund Average are based on open-end mutual funds’ total returns, which include dividends, and are net of fund expenses. Returns for the unmanaged Dow Jones Industrial Average, NASDAQ Composite Index and the S&P 500^® Index are total returns, including dividends. A description of the Lipper benchmark and the market indices can be found on page 63.

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

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

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UNIQUE ATTRIBUTES OF Liberty All-Star^® Equity Fund

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

MULTI-MANAGEMENT FOR INDIVIDUAL INVESTORS

REAL-TIME TRADING AND LIQUIDITY

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ACCESS TO INSTITUTIONAL MANAGERS

MONITORING AND REBALANCING

ALIGNMENT AND OBJECTIVITY

DISTRIBUTION POLICY

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GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

The graph below illustrates the growth of a hypothetical $10,000 investment assuming the purchase of shares of beneficial interest at the closing market price (NYSE: USA) of $6.00 on December 31, 1987, and tracking its progress through December 31, 2022. For certain information, it also assumes that a shareholder exercised all primary rights in the Fund’s rights offerings (see below). This graph covers the period since the Fund commenced its distribution policy in 1988.

	The growth of the investment assuming all distributions were received in cash and not reinvested back into the Fund. The value of the investment under this scenario grew to $58,117 (including the December 31, 2022 value of the original investment of $9,500 plus distributions during the period of $47,500 and tax credits on retained capital gains of $1,117).
	The additional value realized through reinvestment of all distributions and tax credits. The value of the investment under this scenario grew to $310,325.
	The additional value realized through full participation in all the rights offerings under the terms of each offering. The value of the investment under this scenario grew to $490,988 excluding the cost to fully participate in all the rights offerings under the terms of each offering which was $116,228.

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

December 31, 2022 (Unaudited)

The following are the largest ($5 million or more) stock changes - both purchases and sales - that were made in the Fund’s portfolio during the fourth quarter of 2022.

DISTRIBUTION POLICY

The current policy is to pay distributions on its shares totaling approximately 10 percent of its net asset value per year, payable in four quarterly installments of 2.5 percent of the Fund’s net asset value at the close of the New York Stock Exchange on the Friday prior to each quarterly declaration date. Sources of distributions to shareholders may include ordinary dividends, long-term capital gains and return of capital. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during its fiscal year and may be subject to changes based on tax regulations. If a distribution includes anything other than net investment income, the Fund provides a Section 19(a) notice of the best estimate of its distribution sources at that time. These estimates may not match the final tax characterization (for the full year’s distributions) contained in shareholder 1099-DIV forms after the end of the year. If the Fund’s ordinary dividends and long-term capital gains for any year exceed the amount distributed under the distribution policy, the Fund may, in its discretion, retain and not distribute capital gains and pay income tax thereon to the extent of such excess.

December 31, 2022 (Unaudited)

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

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

MANAGERS’ DIFFERING INVESTMENT STRATEGIES

ARE REFLECTED IN PORTFOLIO CHARACTERISTICS

The portfolio characteristics table below is a regular feature of the Fund’s shareholder reports. It serves as a useful tool for understanding the value of a multi-managed portfolio. The characteristics are different for each of the Fund’s five investment managers. These differences are a reflection of the fact that each pursues a different investment style. The shaded column highlights the characteristics of the Fund as a whole, while the final column shows portfolio characteristics for the S&P 500^® Index.

	INVESTMENT STYLE SPECTRUM
PORTFOLIO CHARACTERISTICS	VALUE				GROWTH
AS OF DECEMBER 31, 2022
	Pzena	Fiduciary	Aristotle	Sustainable	TCW	Total Fund	S&P 500® Index
Number of Holdings	36	30	43	29	29	145*	503
Percent of Holdings in Top 10	42%	46%	31%	44%	50%	18%	24%
Weighted Average Market Capitalization (billions)	$63	$166	$149	$298	$342	$193	$418
Average Five-Year Earnings Per Share Growth	5%	9%	14%	21%	20%	13%	16%
Dividend Yield	2.5%	1.5%	2.1%	0.7%	0.6%	1.6%	1.8%
Price/Earnings Ratio**	10x	19x	17x	30x	36x	18x	20x
Price/Book Value Ratio	1.4x	3.0x	3.0x	5.2x	4.3x	2.7x	3.6x

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MANAGER ROUNDTABLE

The managers adhere to their style, strategy and investment process while adapting to a macro environment emerging as much different from an era shaped by declining interest rates, globalization and ‘the peace dividend.’

Liberty All-Star Equity Fund’s five investment managers represent long experience, deep knowledge, proven track records and, given that they represent both growth and value styles of investing, a broad point of view on the stock market and equity investing generally. While they build portfolios from the bottom-up, they operate in a world heavily influenced by external factors. Macro-issues—like inflation, geopolitics, globalization, the pandemic and the possibility of recession—made headlines in 2022. The challenge for the Fund’s managers: Balancing these macro factors against their bottom-up approach to portfolio construction. We asked the managers to take us inside their current thinking using the larger context of the current market environment as a backdrop. The Fund’s Investment Advisor, ALPS Advisors, serves as moderator of the roundtable. Participating investment management firms, the portfolio manager for each and their respective styles and strategies are:

ARISTOTLE CAPITAL MANAGEMENT, LLC

Portfolio Manager/Howard Gleicher, CFA

CEO and Chief Investment Officer

Investment Style/Value – Aristotle seeks to invest in high quality companies that it believes are selling at a significant discount to their intrinsic value and where catalysts exist that will lead to a realization by the market of this true value. Aristotle practices a fundamental, bottom-up research-driven process and invests with a long-term perspective.

FIDUCIARY MANAGEMENT, INC.

Portfolio Manager/Patrick J. English, CFA

Executive Chairman and Co-CIO

Investment Style/Value – Fiduciary utilizes a business owner’s approach to investing by thoroughly examining the economics of the business and the quality of the management team, seeking to invest in durable business franchises that are selling at a discount to their underlying value.

PZENA INVESTMENT MANAGEMENT, LLC

Portfolio Manager/John J. Flynn

Principal and Portfolio Manager

Investment Style/Value – Pzena uses fundamental research and a disciplined process to identify good companies with a sustainable business advantage that the firm believes are undervalued on the basis of current price to an estimated normal level of earnings.

SUSTAINABLE GROWTH ADVISERS, LP

Portfolio Manager/Kishore D. Rao

Principal and Portfolio Manager

Investment Style/Growth – Sustainable focuses on companies that have unique characteristics that lead to a high degree of predictability, strong profitability and above-average earnings and cash flow growth over the long term.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Manager/Craig C. Blum, CFA

Group Managing Director

Investment Style/Growth – TCW invests in companies that have superior sales growth, leading and/or rising market shares, and high and/or rising profit margins. TCW’s concentrated growth equity strategy seeks companies with distinct advantages in their business model.

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Let’s focus on something positive about 2022: Despite it being a difficult year for equities, there were stocks that produced surprisingly good returns. Excluding the energy sector—which benefited from several macro factors—what is a stock in the portion of the Liberty All-Star Equity Fund portfolio that you manage that topped your expectations and what drove the good performance? Let’s ask the Fund’s two growth managers to kick off, starting with Kishore Rao for Sustainable.

Rao (Sustainable – Growth): Biopharmaceutical company Regeneron (REGN) outperformed the market by a wide margin after benefiting from continued strength in sales of its COVID antibody product, the continued successful rollout of new drugs such as Dupixent for atopic dermatitis and eczema, and positive clinical data for a higher dose version of its key drug Eylea for macular degeneration and other related diseases that will likely extend the product’s growth runway. This positive outlook for Regeneron’s Eylea was further boosted by disappointing results from a study involving a potential competitive drug to Eylea.

Blum (TCW – Growth): Ulta Beauty (ULTA) performed particularly well in 2022, gaining 13.9 percent. Ulta carries both prestige and mass brands in its differentiated off-mall specialty store format and the company also has a presence within Target, which we believe may help the company attract even more members to its highly successful customer loyalty program, now at 39 million members, accounting for 95 percent of company sales. The beauty category has been impressively resilient in the face of a challenging inflationary environment and Ulta has been a clear winner. Ulta delivered strong same store sales comps throughout 2022 and we believe its omnichannel capabilities still have room to run—e-commerce sales have doubled since 2019 but still equate to less than 20 percent of overall sales.

Thank you both. Turning to the value managers, perhaps Pat English you could start for Fiduciary.

English (Fiduciary – Value): In our portion of the portfolio, the standouts were our investments in discount retailers including Dollar General (DG), Dollar Tree (DLTR) and TJX Companies (TJX). All of them had positive returns in 2022. We like that all three companies are mostly out of the crosshairs of Amazon as the average ticket is low and what they sell is less susceptible to online competition. Additionally, consumers are looking for ways to stretch their dollar in the wake of high inflation, which has also helped their revenues hold up better than other retailers.

Howard and John, what performed well for you in 2022?

Gleicher (Aristotle – Value): Corteva Agriscience (CTVA), one of the world’s largest seed and crop protection companies, is a company we added to the portfolio in the first quarter of 2020. The business was spun-off from DowDuPont in 2019 and under relatively new CEO Chuck Magro has executed admirably. Corteva’s respected brand and the value-added benefits of its patented seeds and crop protection solutions for farmers have allowed the company to more than offset input cost inflation with sustainable price increases. In addition, Corteva’s ongoing shift to higher-margin, premium products, a catalyst we previously identified, is aiding both sales and profitability. We continue to see room for operational improvements at this still newly independent company.

Flynn (Pzena – Value): The portfolio’s pharmaceutical distributors, McKesson Corp. (MCK) and Cardinal Health (CAH), were each up over 50 percent while most U.S. indices were down double digits. As an industry, the drug distributors have moved past the overhang from widespread opioid-related litigation and the focus has shifted back to fundamentals. Specifically for Cardinal, an activist stake and subsequent management shakeup gave investors confidence that its ailing medical unit would finally be addressed—a key part of the company’s turnaround. McKesson’s performance was more a function of solid operational execution, as the company benefited from its vaccine distribution contracts with the U.S. government, while its specialty pharma business, particularly oncology, drove operating profit growth.

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Great start. So, moving on … from either perspective, short or long term, the investment environment looks changed going forward. For 2023, some equity market pundits expect a gain of 25 percent while others see inflation and high interest rates enduring well into the second half and a recession likely at some point. In 2023 and beyond, it appears that the regime of easy money, low inflation and globalization have come to an end. How are you factoring these short- and long-term prospects into your portfolios? Let’s ask the value managers to lead off.

Gleicher (Aristotle – Value): Our study of individual businesses will always take precedence over macro thinking, but we do not hide from the reality that the economy, inflation, interest rates and globalization are important factors to bear in mind. At the company level, we seek businesses that have the ability to thrive in all environments. We are not infallible, however, so at the portfolio level we seek to diversify away factors that are outside of companies’ control, such as interest rates and inflation. We accomplish this by building a focused, yet diversified portfolio of 40-plus holdings across various areas of the economy. Over the past year we have increased the portfolio’s exposure to companies that we believe possess more predictable cash generation profiles, such as utilities, pharmaceuticals and food distribution, while reducing exposure to more economically sensitive areas such as banking and digital advertising.

“At the company level, we seek businesses that have the ability to thrive in all environments. We are not infallible, however, so at the portfolio level we seek to diversify away factors that are outside of companies’ control, such as interest rates and inflation.”

—Howard Gleicher

(Aristotle – Value)

English (Fiduciary – Value): We are in the more optimistic camp. The near term will be challenging given that interest rates are rising. There are, however, several encouraging data points to consider: labor markets remain tight globally and nominal wages are on the rise (though they have still yet to catch up with inflation in most economies); China is finally reopening; supply chain disruptions are improving; and inflation appears to have peaked. We are optimistic over the long term and believe economic growth may surprise on the upside in the coming years. In our view, the normalization of interest rates is a very encouraging development, as ultra-low rates led to significant speculation, asset price inflation, financial engineering, and value-destructive merger and acquisition activity. We expect that normal interest rates will help force companies to prioritize organic capital investment and research and development, which would do more for underlying economic growth, value and employment.

“In our view, the normalization of interest rates is a very encouraging development, as ultra-low rates led to significant speculation, asset price inflation, financial engineering, and value-destructive merger and acquisition activity.”

—Patrick English

(Fiduciary – Value)

(Unaudited)

Flynn (Pzena – Value): As long-term fundamental investors, we focus on the future earnings power of the businesses in which we invest. For value investors, investment opportunities present themselves typically because something has gone wrong and investors’ assessment of the range of outcomes—often a combination of macro and company-specific concerns—drives down the share price. As such, we spend a lot of time and effort understanding a company’s ability to “weather the storm.” We evaluate the strength of the balance sheet and liquidity profile to ensure the business can persist in a range of economic environments. Valuation discipline remains at the heart of our process, and today we are finding opportunities in a number of sectors, including companies whose price increases have lagged cost inflation thus far, resulting in margin contraction. We believe this negative dynamic will be temporary as fluid management teams adjust operations and cost structures.

Growth managers, how are you factoring the range of forward expectations into your portfolio decisions? Thoughts, Craig?

Blum (TCW – Growth): We maintain a ballast of less economically sensitive names in the portfolio to help weather anticipated challenges like market volatility, possible recession, slowing demand, and production and supply side disruptions. Longer term, however, we are encouraged that 13 years of easy money appear to be coming to an end. Our portfolio has often done better with less fiscal and monetary stimulus when quality growth businesses—our bailiwick—with strong balance sheets, business model advantage and the ability to consolidate industry positions prosper and weaker, negative cash flow businesses buoyed by low interest rates are no longer bid-up.

“We are encouraged that 13 years of easy money appear to be coming to an end. Our portfolio has often done better with less fiscal and monetary stimulus when quality growth businesses—our bailiwick—prosper.”

—Craig Blum

(TCW – Growth)

Rao (Sustainable – Growth): Our valuation discipline and focus on cash flows available to shareholders (CFATS) have been key elements of our investment philosophy since the firm’s founding in 2003. While this often went unrewarded during the easy money era, we are now well prepared for any lasting monetary policy regime change as the Federal Reserve focuses on significantly reducing inflationary pressures in the U.S. In the near term, with both interest rates and oil prices higher but fiscal stimulus reduced, we expect GDP growth to slow and corporate earnings growth to be pressured. As such, we expect our strategy’s focus on more predictable, consistent, reliable generators of cash flows to perform better on a relative basis. Moreover, over the course of 2022, we actively hardened our portfolio in anticipation of slower economic growth and possible recession. More specifically, we sold positions in RingCentral (RNG), Meta Platforms (META, Facebook’s parent), PayPal Holdings (PYPL) and Disney (DIS). We initiated new positions in Aon (AON), IQVIA (IQV), Starbucks (SBUX), Ecolab (ECL) and Sherwin-Williams (SHW) thereby upgrading business quality and expected sustainable growth.

“With both interest rates and oil prices higher but fiscal stimulus reduced, we expect GDP growth to slow and corporate earnings growth to be pressured ... we expect our strategy’s focus on more predictable, consistent, reliable generators of cash flows to perform better on a relative basis.”

—Kishore Rao
(Sustainable – Growth)

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Between value and growth styles, value stocks were the steadier performers in 2022 (albeit on a relative basis) but there were periods when growth stocks rallied, and fairly strongly. Looking forward, there’s a case to be made for both styles. Give us your 30-second elevator speech arguing the case for your style, either growth or value, in 2023. What’s the case for growth, Kishore and Craig?

Rao (Sustainable – Growth): As higher interest rates, higher energy prices, slower growth in China and the shift toward deglobalization negatively impact economic growth and in turn corporate profits, the more predictable and sustainable growth of our businesses—supported by stronger pricing power, recurring revenue streams and attractive free cash flow generation—is likely to be rewarded. Higher interest rates are likely already largely factored into stock prices but the coming reduction in corporate profits is likely not, and that will be a key differentiating factor that should benefit our approach in 2023.

Blum (TCW – Growth): Why growth in 2023? Growth tends to outperform value when profits decelerate—the economy is clearly slowing—and compression in price/earnings multiples has already occurred as it leaves many growth stocks cheap relative to their future prospects. Furthermore, some of the “most defensive,” i.e., value stocks, carry incredibly high price/earnings ratios relative to future growth prospects. I’d cite Alphabet (GOOGL) at 17 times earnings versus Clorox (CLX) at 38 times. As stock pickers, we have never been caught up in the “growth versus value” debate. We are concerned with finding value in companies that have discernible business model advantage in growing end markets. We believe there is a plethora of opportunities given the current market set-up.

Value managers, what’s the case for value going forward? Let’s go in alphabetical order starting with Aristotle.

Gleicher (Aristotle – Value): The past several years of abnormally low interest rates led some market participants to throw caution to the wind and 2022 served as a humbling reminder that intrinsic value is not determined by the highest bidder, but rather the sustainable cash flow production of an enterprise. Value investing is often associated with lower quality, but our philosophy is different. We look for high quality companies whose current stock prices do not reflect the intrinsic value of the enterprise. We believe that sticking to companies with excellent balance sheets, strong cash flow and proven, predictable business models is the best way to add value for our clients. This is the recipe we have followed for more than 20 years and one we will continue to follow for the decades ahead.

English (Fiduciary – Value): We have been walking through the value investing desert over the past decade! We view the current backdrop as far more conducive for stock picking—and value investing—than has been the case in recent years, as valuations have compressed, investor sentiment is low and interest rates are finally on a path toward normalization. Growth stocks have been the primary beneficiary of ultra-low rates. Now, owning high quality businesses with strong balance sheets that trade at a discount to the market should be a winning formula once again.

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Flynn (Pzena – Value): Despite value’s strong relative performance in 2022, we believe the investment opportunity remains very attractive. Cheap stocks continue to trade at a material discount to the expensive corners of the market. In fact, the price-to-book dispersion between the first and fifth quintiles of U.S stocks is nearly two standard deviations (92nd percentile) above the historical mean, and value equities are one of the few asset classes offering real earnings yields today. Concerns over a recession may materialize; however, recessions are typically not as severe as most fear and the five-year period following the start of a recession has proven to be an especially good entry point for value stocks.

“Concerns over a recession may materialize; however, recessions are typically not as severe as most fear and the five-year period following the start of a recession has proven to be an especially good entry point for value stocks.”

—John Flynn

(Pzena – Value)

We started on a positive note, so let’s end that way. Putting asde the challenges of 2022 and the mixed outlook for 2023, as you look out two to three years, what is an industry about which you are bullish and what is a stock within that industry that exemplifies your optimism? Which industry’s prospects do Sustainable and TCW like?

Rao (Sustainable – Growth): Our investment approach is focused on identifying attractive high quality growth companies expected to benefit over our three- to five-year investment horizon. We do not focus on the relative performance of industries. In some cases, however, there can be factors that impact a wide array of industry players. With COVID restrictions dropping and the U.S. and much of the world learning to live with COVID, we see an attractive growth runway for select health care stocks as procedures that have been put off for years begin to be done. This catch-up in procedures will benefit companies such as robotic surgery leader Intuitive Surgical (ISRG). In addition to the tailwind from renewed procedure growth, the company stands to benefit from the continued long-term focus on providing health care in the most cost-effective manner possible.

Blum (TCW – Growth): We believe the move toward clean energy is an irrefutable secular trend and Enphase Energy (ENPH) is a company poised for further growth. Its integrated solutions manage solar generation, storage and communication on one platform, thus maximizing a home’s energy potential while also providing advanced monitoring and remote maintenance capabilities. While about 80 percent of company revenues are currently derived from the U.S. residential market, we believe several other growth vectors exist for Enphase including storage, the U.S. commercial market, international markets, portable power solutions and distributed energy grid solutions. Though not part of our initial buy thesis, the company also benefits from the Inflation Reduction Act of 2022 as the act includes clean energy tax credits that restore a 30 percent tax credit for residential solar systems and extend the program to 2034.

Interesting outlooks in both instances. Let’s round it out with what the value managers see ahead. We’ll start with Pzena and John Flynn.

Flynn (Pzena – Value): We’ve been adding to consumer discretionary names over the past few quarters, as valuations have gotten exceedingly cheap given the market’s incessant recession fears. One such name is PVH Corp. (PVH), owner of the Tommy Hilfiger and Calvin Klein fashion labels. Their underlying performance strongly suggests the brands are as solid as ever, but PVH’s share price—down over 33 percent in 2022 and trading at just 8.5 times its forward earnings estimate—implies otherwise. The factors underpinning PVH’s material valuation discount, including European recessionary conditions, elevated raw materials prices, minimal North American tourism and other factors are, in our view, almost entirely temporary and unlikely to persist longer term. We therefore believe investors are disregarding PVH’s long-term value proposition and potential for significant earnings normalization, as shares are trading at just about 6 times our normal earnings estimate.

(Unaudited)

English (Fiduciary – Value): Many stocks tied to the housing market have declined precipitously from their peaks over the past year and sell at reasonable multiples. For example, Ferguson PLC (FERG) is based in the United Kingdom and distributes plumbing and heating products to trade professionals. The company has recently moved its primary listing to the United States, but the stock is not in any of the U.S. indices. Ferguson’s market capitalization is $25 billion so it should be added to most indices in the coming years. Approximately 60 percent of Ferguson’s sales are driven by remodeling, maintenance and improvement work, versus 31 percent in 2008. This segment is less cyclical and typically carries higher margins than sales to the new build market. Over the last decade Ferguson has focused on organic growth and returns, strengthening its already market-leading U.S. business and divesting operations in several less attractive geographies.

Howard, wrap it us for us, please.

Gleicher (Aristotle – Value): Over the past year we have increased our exposure to a sector I mentioned earlier—utilities. The market does not seem to be appreciating the long-term investment cycle needed to upgrade electric and gas infrastructure across numerous states. More than 80 percent of natural gas pipelines need replacing and electric grid updates are necessary to support the demand for clean energy. Our investments in Atmos Energy (ATO), a Texas-based gas utility, and Xcel Energy (XEL), a Midwest-focused electric and gas utility, stand to benefit from the ongoing investment cycle to upgrade our nation’s energy infrastructure.

Many thanks to each of you … clearly, well thought-out responses. Conditions changed dramatically in 2022, and it is interesting to see how each of you is not only adapting to this very different environment, but also adapting the new environment to your style, strategy and investment process.

December 31, 2022

See Notes to Financial Statements.

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See Notes to Financial Statements.

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See Notes to Financial Statements.

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See Notes to Financial Statements.

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See Notes to Financial Statements.

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See Notes to Financial Statements.

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See Notes to Financial Statements. 

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See Notes to Financial Statements.

For the Year Ended December 31, 2022

See Notes to Financial Statements.

See Notes to Financial Statements.

Liberty All-Star^® Equity Fund

Financial Highlights

See Notes to Financial Statements.

Financial Highlights

December 31, 2022

NOTE 1. ORGANIZATION

Liberty All-Star^® Equity Fund (the “Fund”) is a Massachusetts business trust registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as a diversified, closed-end management investment company.

Investment Goal

The Fund seeks total investment return comprised of long-term capital appreciation and current income through investing primarily in a diversified portfolio of equity securities.

Fund Shares

The Fund may issue an unlimited number of shares of beneficial interest.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The Fund is considered an investment company under U.S. generally accepted accounting principles (“GAAP”) and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board Accounting Standards Codification Topic 946 Financial Services - Investment Companies.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from these estimates.

Security Valuation

Equity securities are valued at the last sale price at the close of the principal exchange on which they trade, except for securities listed on the NASDAQ Stock Market LLC (“NASDAQ”), which are valued at the NASDAQ official closing price. 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.

Cash collateral from securities lending activity is reinvested in the State Street Navigator Securities Lending Government Money Market Portfolio (“State Street Navigator”), a registered investment company under the 1940 Act, which operates as a money market fund in compliance with Rule 2a-7 under the 1940 Act. Shares of registered investment companies are valued daily at that investment company’s net asset value ("NAV") per share.

The Fund’s investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value according to procedures adopted by the Fund's Board of Trustees (the "Board"). Effective September 8, 2022, the Board approved changes to the Fund's valuation policy to comply with Rule 2a-5 and designated ALPS Advisors, Inc. (the "Advisor") as the Fund's Valuation Designee (as defined in the rule). The Valuation Designee will be responsible for determining fair value in good faith for all Fund investments, subject to oversight by the Board. When market quotations are not readily available, or in management’s judgment they do not accurately reflect fair value of a security, or an event occurs after the market close but before the Fund is priced that materially affects the value of a security, the security will be valued by the Advisor’s Valuation Committee using fair valuation procedures established by the Valuation Designee. Examples of potentially significant events that could materially impact a Fund’s net asset value include, but are not limited to: single issuer events such as corporate actions, reorganizations, mergers, spin-offs, liquidations, acquisitions and buyouts; corporate announcements on earnings or product offerings; regulatory news; and litigation and multiple issuer events such as governmental actions; natural disasters or armed conflicts that affect a country or a region; or significant market fluctuations. Potential significant events are monitored by the Advisor, Sub-Advisers and/or the Valuation Committee through independent reviews of market indicators, general news sources and communications from the Fund’s custodian. As of December 31, 2022, the Fund held no securities that were fair valued.

December 31, 2022

Security Transactions

Security transactions are recorded on trade date. Cost is determined and gains/(losses) are based upon the specific identification method for both financial statement and federal income tax purposes.

Income Recognition

Interest income is recorded on the accrual basis. Corporate actions are recorded on the ex-date.

Dividend income is recognized on the ex-dividend date, or for certain foreign securities, as soon as information is available to the Fund. Withholding taxes on foreign dividends are paid (a portion of which may be reclaimable) or provided for in accordance with the applicable country’s tax rules and rates and are disclosed in the Statements of Operations.

The Fund estimates components of distributions from real estate investment trusts (“REITs”). Distributions received in excess of income are recorded as a reduction of the cost of the related investments. Once the REIT reports annually the tax character of its distributions, the Fund revises its estimates. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains.

Lending of Portfolio Securities

The Fund may lend its portfolio securities only to borrowers that are approved by the Fund’s securities lending agent, State Street Bank & Trust Co. (“SSB”). The Fund will limit such lending to not more than 30% of the value of its total assets. The borrower pledges and maintains with the Fund collateral consisting of cash (U.S. Dollar only), securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, or by irrevocable bank letters of credit issued by a person other than the borrower or an affiliate of the borrower. The initial collateral received by the Fund is required to have a value of no less than 102% of the market value of the loaned securities for securities traded on U.S. exchanges and a value of no less than 105% of the market value for all other securities. The collateral is maintained thereafter, at a market value equal to no less than 100% of the current value of the securities on loan. The market value of the loaned securities is determined at the close of each business day and any additional required collateral is delivered to the Fund on the next business day. During the term of the loan, the Fund is entitled to all distributions made on or in respect of the loaned securities. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions.

December 31, 2022

Any cash collateral received is reinvested in State Street Navigator. Non-cash collateral, in the form of securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, is not disclosed in the Fund’s Statement of Assets and Liabilities or the contractual maturity table below as it is held by the lending agent on behalf of the Fund and the Fund does not have the ability to re-hypothecate these securities. Income earned by the Fund from securities lending activity is disclosed in the Statement of Operations.

The following is a summary of the Fund's securities lending positions and related cash and non-cash collateral received as of December 31, 2022:

The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate these risks, the Fund benefits from a borrower default indemnity provided by SSB. SSB’s indemnity allows for full replacement of securities lent wherein SSB will purchase the unreturned loaned securities on the open market by applying the proceeds of the collateral, or to the extent such proceeds are insufficient or the collateral is unavailable, SSB will purchase the unreturned loan securities at SSB’s expense. However, the Fund could suffer a loss if the value of the investments purchased with cash collateral falls below the value of the cash collateral received.

The following table reflects a breakdown of transactions accounted for as secured borrowings, the gross obligation by the type of collateral pledged or securities loaned, and the remaining contractual maturity of those transactions as of December 31, 2022:

Fair Value Measurements

The Fund discloses the classification of its fair value measurements following a three-tier hierarchy based on the inputs used to measure fair value. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.