Liberty All-Star Equity Fund (NYSE:USA) and Liberty All-Star Growth Fund (NYSE:ASG) are the only two Liberty All-Star closed end funds created by ALPS in 1986. They started trading in November 1987. I will take a look over their 27 year history to see if they lived up to their title.
ALPS outsources the management of USA. It has five teams. Matrix Asset Advisors, Inc, Pzena Investment Management, LLC, and Schneider Capital Management do all the value investing. Cornerstone Capital Management and TCW Investment Management Company are on the growth side. The objective of the fund is to use long term capital appreciation and current income by investing 80% of its nets assets in a diversified portfolio. The investment style for this fund is focused on all U.S. large cap equities. The financial sector is its top sector. It does not use any leverage. The table below was taken from Morningstar's website.
USA's distribution policy is to pay a quarterly dividend from its income at a rate of 6%. This can be seen in the link above. If it is unable to pay it out as income it has made up the difference by distributing long-term capital gains.
From the Yahoo graph below the price of USA has done fine when the economy is doing well but really awful during dips. The price of USA seems to be affected more by bad economic times than good times. Overall USA's price has returned a negative 9.65%. The dividend has helped greatly and has made the total return 236.87%. On an annualized basis the return is 5.76%. This isn't too bad. Some investors would have probably loved to have a 5.76% return on their money for 27 years. The investment would have quadrupled by now. On the other hand, the annualized yield of the Dow Jones and S&P 500 during the same time is 8.22% and 7.9%. The fund has lagged the market. The returns on the DOW and S&P came from Measuringworth.com.
AGS is the second Liberty All-Star Fund. Its objective is to seek long-term capital appreciation through investments in a diversified equity portfolio. This fund is outsourced too. Weatherbie Capital manages the small cap equities and TCW Investment Management Company manages the mid and large cap equities. The investment style of ASG is a little more aggressive than USA. The majority of its holdings are in medium cap growth stocks. The two largest sectors are tech at 28% and the consumer cyclical sector at 17%. These are probably the most cyclical sectors. Most of the holdings are in U.S. equities. They do not use leverage. This fund also tries to maintain a 6% dividend. The table below came from Morningstar.com
Just like with USA, ASG's price steadily moves along until the economy turns bad and then it falls. Over its life the price has decreased by 44%. The dividend yield is high enough to overcome this. After dividends the return has been 129%. This comes out to be an annual return of 3.14%. ASG is underperforming the market too.
I think the main reason why these two funds are doing so poorly is because they never fully recover after a downturn in the economy. Looking at USA's chart we see that in 2000 it got as high as $13. The tech bubble burst and it dropped to $7. It climbed back to $9.00. In 2009 the recession hit and the price dropped down to $2. It was able to get back to $6. $6 is still below the previous high of $9. After each crisis the fund creates a lower ceiling. The same can be said for ASG. This is not what happens to the underlying stocks that these funds invest in. Amazon (NASDAQ:AMZN) is a top holding in each fund. It was crushed in the tech bubble and dropped from $85 to $10. It got back to $80. After the recession the price cut in half. In December of 2013 it almost reached $400. This is what most of the large cap stocks have done. These stocks are able to rebound. I don't know why USA or ASG aren't able to do the same thing. Maybe the reason is because of their capital structure. After the initial investment the funds are closed off from getting anymore capital. If they can't get more capital the managers can't invest when the market drops. On the other hand, these funds are being actively managed. The managers should be able to manage the investments properly enough to produce adequate returns with the assets they have. One would expect them to do better than the market. That is what they are paid for. If the managers can't do that then they need to be replaced.
The table below shows some of the funds' statistics side by side. Overall USA has done much better than ASG. Both have performed worse than the market. The prices are below the NAV which is concerning. The expense ratios seem a little high. I don't believe they are all-stars. They should probably be benched.
|Fund Style||Large Cap||Growth Equities|
|5 Yr Return||46%||75%|
I don't think I will ever invest in ASG. The fund is mainly investing in growth stocks. It charges a higher fee than USA. The overall return is worse than USA. Instead of ASG I would rather create a two ETF portfolio using Vanguard's Information Technology ETF (NYSEARCA:VGT) and its Consumer Discretionary Index ETF (NYSEARCA:VCR). The Yahoo graph below shows that both these ETFs have had higher returns than ASG.
I had decided within the past month to buy some USA. It has a high dividend which I like. The price is low so I can buy a lot of shares. I also like the holdings in the fund. This is one way I can invest in large cap funds since I am unable to buy the actual stocks. However, I'm starting to wonder if I made a wise choice. After seeing the annual return I am not that impressed with it. I am also worried about future recessions. If one happened I would probably lose some initial investment and the price may never recover.
Disclosure: The author is long USA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.