Liberty All-Star Equity CEF: We Are Not There Yet (NYSE:USA)

USA Blank 3D Geographic Map Render Abstract Layers

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The Liberty All Star Equity Fund (NYSE: USA) is a multi-managed closed-end equity fund. The US does not use leverage. The CEF is a gold standard in the equity CEF space as it has historically outperformed the index and gives investors a high dividend yield from stock market returns. Like the index, however, the US derives its performance from positive returns in equity markets. This year the fund is down significantly (-21.5% total return) and has moved in step with the S&P 500:

what is the return

2022 total return (search alpha)

The CEF is overweight financials versus the S&P 500, and while the financials sector has fared much better than other areas of the markets (the Financial Select Sector SPDR Fund (XLF) is down just -17% year-to-date), the US hasn’t surpassed index. We believe this is due to stock selection and some weak top positions such as Adobe (ADBE) which suffered a significant loss last week on its earnings forecast and purchase of Figma.

In theory, at least, CEF’s portfolio is well positioned to weather the storm. According to BlackRock:

We advocate using a barbell strategy to position yourself for these competing outcomes. This includes owning energy and financials as inflation fighters and health care for a dose of resilience. We think other traditionally defensive sectors, including utilities and staples, are expensive relative to the broader market.

However, the US will ultimately follow the path of the general stock market. If the S&P 500 shows any more weakness, the US will continue to decline. We believe the next shoe to be dropped is the earnings component of P/E:

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where is the stone

profit decline (black skirt)

We believe last week’s horrendous FedEx guidance is just a taste of what’s to come as a market-wide earnings revision storm ensues. Where the bottom is in the index depends as much on the earnings component as it does on P/E derating:

where is the merit

S&P 500 P/E & Earnings Matrix (Alliance Amber)

We think we are moving towards the long-term average of 15x P/E with a -5% to -10% correction down on earnings. That should move the index to the low 3000 levels.

If you’re considering buying the US, imagine you’re buying the S&P 500 in CEF format (meaning you’re getting quarterly dividends rather than long-term capital gains). The structure is also trading flat again to NAV and its premium has fluctuated this year due to risk on/risk off movements.

We think we’re not there yet with the share class falling this year, so we don’t think buying the US is an attractive entry point here. We need to see broad equity capitulation before we consider buying the US, a very resilient equity CEF that has historically had stellar results on positive equity market returns.

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The fund’s investment advisor (ALPS Advisors) allocates portfolio management decisions to five different asset managers:


fund manager (fund data sheet)

In addition to using Fiduciary Management, Pzena Investment, Sustainable Growth Advisers, TCW and Aristotle Capital for portfolio decisions, ALPS also analyzes fund style allocation through the combination of three value and two growth investment managers.


The fund is overweight financials and materials relative to the S&P 500:

What is my branch

sectors (Author / Seeking Alpha)

We can see that the US has a very high allocation to financials at the expense of technology relative to the index.

Top holdings include only large-cap names with the notable presence of Adobe, which suffered a significant loss last week on its outlook and purchase of Figma:


Top 10 Holdings (search alpha)


The fund has moved in step with the index in 2022:


2022 total return (search alpha)

As can be seen from the total return chart above, despite the fund’s overweight financials positioning, we have yet to see any outperformance versus the index.

On a 3-year basis, the CEF now follows the index:

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where is the money

3 year total return (search alpha)

We can see that the fund performed very well right after the Covid crisis, which allowed the vehicle to outperform the index. The CEF has now given back all those gains and made a mid-reversal.

Premium/discount on NAV

Historically, the fund has traded at discounts to net asset value:

who is my star

Premium/discount on NAV (morning star)

However, since the zero interest rate environment caused by the Covid crisis, the fund has moved towards a premium to NAV:

Data from YCharts

The CEF has spent most of 2022 at a premium. The size of the premium correlates well with general risk-on/risk-off movements in the market. During the market sell-off in June, we saw premiums plummet from 10% to almost 0%. Expect this vector to change with market risk appetite.


USA is a prime equity CEF. The fund has delivered robust long-term results, supported by positive annual returns in the North American equity market. The vehicle is currently overweight financials versus the index (>8% allocation difference) and is theoretically well positioned for today’s environment. The fund has moved lower in step with the S&P 500 year to date, down more than -20% so far. The US will ultimately follow the path of the general stock market. If the S&P 500 shows any more weakness, the US will continue to fall. We believe we are not there yet with the current bear market and the next shoe we drop is the earnings component from P/E. We are targeting a repeat of the June 2022 market lows.

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