USA: 10% Yield On Value And Growth

We began covering the Liberty All-Star® Equity Fund (NYSE:USA), and the Liberty All-Star® Growth Fund (ASG) in September 2020.

Since then, USA’s total return of 55% has nearly kept up with the S&P 500 (SP500), which returned 59.5% during this period, but ASG has lagged by a wide margin, returning just 2.95%.

Importantly for income investors, USA paid 43% in cumulative distributions during this period, vs. 6.8% for the S&P. ASG paid 32.7% in cumulative distributions, but most of that income was discounted in its total return, due to price losses:

In our most recent article on these 2 closed-end funds, or CEFs, we rated them both as Buys, due to the probability of falling interest rates in 2024.

Once again, USA has outperformed ASG, returning 11.58% so far in 2024, better than the S&P’s 8.81% return, and far better than ASG’s 3.63% return:

Fund Profiles:

“The Liberty All-Star® Equity Fund is a core equity holding that allocates its assets to 3 value style investment managers and 2 growth style investment managers. As is well known to professionals, market sentiment routinely rotates among these 2 principal investment styles as market and economic conditions change. At any point in time, one style is usually favored over the other. By allocating its assets to multiple managers representing both styles, the Fund seeks more consistent performance, which, over time, can produce better results than more volatile single-manager funds.” (USA site.)

“The Liberty All-Star® Growth Fund follows a similar principle but with an exclusive focus on growth style investing. The Fund allocates its assets among 3 investment managers, each specializing in either large-cap, mid-cap or small-cap growth style equities, thus diversifying the Fund across the capitalization spectrum. The result is a high-quality, multi-cap growth holding for long-term investors.” (ASG site.)

Dividends:

At $6.82, USA has a forward dividend yield of 10.56%, vs. 9.16% for ASG. While the USA fund has had minimal dividend growth over the past 5 years, its 2024 distributions have risen from $.15 to $.17 to $.18, as its NAV has risen.

ASG has had 6.78% dividend growth over the past 5 years, and its 2024 distributions have also risen, from $.10 to $.11 to $.12.

After not covering its distributions in 2022 via NII and net realized gains, USA’s Net Assets from Operations decreased by $412M. This situation reversed in 2023, with NII and NII and net realized gains fully covering distributions, and Net Assets from Operations increasing by ~$397M:

ASG also didn’t cover its 2022 distributions with NII or capital gains. 2023’s $24.9M in distributions came mostly from Return of Capital:

Taxes:

USA’s 2023 payouts were characterized as 88% long term capital gains, with no Return of Capital, and 11.28% qualified dividends:

ASG’s were characterized as 100% Return of Capital:

Holdings:

As of 3/31/24, the largest change in USA’s sector exposure was a decrease from 22.3% in Tech as of 11/30/23, to 21.2%.

USA’s management replaced Adobe with a position in Schwab in its top 10 holdings, while the other 9 positions remained at similar percentages to their 11/30/23 weightings. The top 10 accounted for ~21% of USA’s portfolio.

ASG’s sector exposure is much heavier than USA’s in Healthcare and Industrials, and much lighter in Financials, Communications Services and Materials.

ASG’s top 10 accounts for ~18.4% of its portfolio. Management replaced Progyny and Workday with healthcare diagnostics firm Natera, and SiteOne Landscape Supply.

Long-Term Performance:

USA’s more recent NAV and price returns have outperformed ASG’s over the past 1-, 3-, 5-, and YTD periods, and have slightly trailed the Lipper large cap core average index in all the periods listed below.

ASG’s best NAV returns have been over a 10-, 15-, and 20-year period, when it outperformed USA. Its market price returns outperformed USA’s over the past 20-year period, but have trailed in all the other periods, but trailed only slightly over the past 15 years.

Valuations:

A useful strategy when buying CEF’s is to try to buy them at deeper discounts or lower premiums than their historical averages, due to mean reversion. NAV is measured after the market close. As of the 5/8/24 close, USA was selling at a 1.02% discount to NAV/Share, a deeper discount than its 3-year and 5-year average prices to NAV, but not as deep as its 1-year 1.63% discount.

ASG’s 8.6% discount to NAV is deeper than its 1-year average of 6.59%, and much deeper than its 3- and 5-year prices to NAV/Share.

Parting Thoughts:

We’ll continue to hold USA and ASG for income, and we may add more USA if a larger discount appears. While ASG has a larger than average discount to NAV, it has been trading at a discount since Q4 ’22.

The “delay” in cutting interest rates has hurt small caps much more than large caps, with the Russell 2000 up ~1.8% year to date, vs. the S&P’s ~8% gain. Although it’s not specifically a small-cap fund, ASG’s heavier growth stock component will most likely continue to lag the market, until rates recede.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.