CEF Insights: Liberty All-Star’s Multi-Manager Equity Strategies for Income (NYSE:ASG)

CEFA:

Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association.

Joining us today is Robert Milas, Director of Research with SS&C ALPS Advisors. ALPS Advisors is the investment manager of the Liberty All-Star Growth Fund, ticker NYSE: ASGand Liberty All-Star Equity Fund, ticker NYSE: USA.

Rob, we’re glad to have you with us today.

Robert Milas:

Oh, it’s so good to be with you. I look forward to talking.

CEFA:

Rob, the two Liberty All-Star funds are quite unique in the closed-end fund space in that they use a multi-manager approach. Can you discuss this approach for US and ASG and also how this investment approach fits with the closed-end fund structure?

Robert Milas:

Our multi-manager approach is designed to promote consistency of performance while we leverage each of the manager’s unique skills, processes and style. It’s a portfolio building process that Liberty has really employed for over 37 years and it’s really proven to be very successful for us. So for ASG or All-Star Growth Fund, this is an all-cap growth portfolio, both large, mid and small, all mixed together. And then, for the US, it’s an All-Star equity fund. So this is a large-cap investment portfolio, so we have both growth managers and value managers.

So again, ASG, three managers, one big, one medium, one small. USA has five managers. That’s two growth managers along with three value managers for that. And we think this combination of styles is very favorable because these styles come in and out of the market cycle.

And we don’t expect everyone to perform identically in the four phases of a full market cycle. And the goal is to combine these managers, again, as I talked about earlier, was consistency, and really, it’s meant to support the overall philosophy of both the growth policy and the distribution policy, which is, obviously, the income part of the portfolio for the final investor.

CEFA:

As an investment manager, what is your process for identifying portfolio managers who may be suitable to sub-advise a component of ASG or US, and how do you ultimately select the managers who work with the funds?

Robert Milas:

We start with the five Ps, which I think most people will recognize as people, process, philosophy, parent organization and performance. And I’m not going to go into a lot of detail about all of that, but philosophically for us, we prefer stock pickers. Those with as little distraction from the stock selection process as possible. So we generally gravitate towards boutique managers, institutional money managers who run focused portfolios.

We want them to let their ability to generate alpha shine. And then finally, when we think about the managers that we hire and we put them together, we really try to put together a glove and not a glove. And so matching is very important. We don’t just go out and select great managers and put them together in a portfolio and hope it works.

We really look at the managers, who we think are all great, but they have to complement each other. In other words, they match. So when we look for a manager, we test each prospect for the five Ps, but also how they complement each other in the stylistic portfolio. And we do this through deep fundamental qualitative and quantitative analyses.

So, at the end of the day, we expect all of our managers to perform over the entire market cycle, but we know that each strategy will perform differently during the four different phases of a full market cycle, which are expansion, peak, contraction and the recovery phase.

CEFA:

Similarly, once sub-advisors are in place, how do you evaluate their performance and, if necessary, make the decision to replace a sub-advisor?

Robert Milas:

Here we are back to the five Ps again and what we’re looking for is has there been a change? And it’s pretty much the four P’s. We look at performance as a symptom of a change in one of the other four P’s, again, being people, process, philosophy and the parent organization. So we consider it a Hotel California, hard to get in and hard to get out of, just because of the amount of due diligence we do on our sub-advisors before we hire them.

So again, going back to the glove analogy, if I have a glove with one finger, that doesn’t happen to be right. You tend to keep the glove because of its great qualities of warmth and durability. But at some point, you know it’s time for a new pair of gloves. We’ve been doing this for a long time as a team, and we know when a change is needed and if the sub-counselor or one of the five Ps has changed and the finger in the glove is no longer working as it should.

As we go through the history of our manager changes in the two funds, there have been 10 manager changes in the ASG Fund since 1995 when we took over the management of that fund. There have been 19 manager changes at the US Fund. And again, remembering that there are three managers for the ASG and five managers for the USA, but 19 manager changes for the USA since 1986.

And we have two sub-advisors for over 20 years. So we make changes when necessary, but we don’t really have an itchy finger. But we are also aware that business dynamics, market dynamics change over time. And so sometimes this may require a change of sub-adviser. So we systematically monitor changes to stocks in each of our manager’s sleeves, risk exposures, positioning and characteristics.

We test these changes against our understanding of the manager’s philosophy and process to avoid style deviation from a manager that could negatively impact one of the funds.

CEFA:

Rob, especially with closed-end funds, investors often place a high degree of importance on a fund’s distribution policy. Can you provide a brief overview of US and ASG distribution policies and how the multi-manager approach supports the policies?

Robert Milas:

Again, ultimately, the purpose of the multi-manager investment discipline is to support distribution policy. And our long-term profitability must be strong enough and consistent enough to support this policy. Although it is occasionally necessary to return capital, it is not our purpose to do so on a regular basis. We’re constantly looking at a number of areas that will drive our support for distribution policy, including considering what we do around portfolio rotation, rebalancing and replacing managers.

So the two funds have distribution policies. The US is to pay 2.5% per quarter or 10% annually. For ASG, that fund pays 2% quarterly or 8% annually. The multi-manager structure, again, is designed to combine performance engines and thereby smooth the return on investment relative to each individual manager and unique philosophy, process and style.

So again, as we know, the market plays out, and like my bell bottom, it goes in and out of style. And replacing managers usually results in capital gains, so their policy has a systematic mechanism for distributing those gains to shareholders.

CEFA:

Rob, how are the US and ASG portfolios currently positioned?

Robert Milas:

So ASG, we combine the Russell benchmarks for small, mid and large caps, again, because that’s how management is structured. And relative to that mix, we’re currently overweight financials, healthcare, and underweight technology. So the average weight of 35% in technology for our managers is a high hurdle for them to meet and so that is the reason for the underweight in technology.

And I find growth both within technology and outside of technology. And again, that dictates that allocation. In general, the fund is smaller in capitalization and higher in quality, and the fund has an active share of 80%. For the US, we really look at it relative to the S&P 500, and we’re overweight financials and underweight technology there. Here again, 32% of the benchmark S&P 500 is in tech.

So we’re a little underweight on that, a little more diversified. So not only are we more diverse, we’re less. And the peak cap growth really skewed that composition of that S&P 500. On that fund, we have 61% active share for our managers, and so our portfolio will look different than the S&P 500. And we really welcome that profile. in the long term.

CEFA:

Rob, how do you see these two multi-manager equity strategies best positioned in an investor’s diversified portfolio?

Robert Milas:

US and ASG use the closed-end fund structure to provide equity-like returns along with a steady distribution stream. So I see it as ideal for investors looking for income in a vehicle that differs from other income-producing structures, including annuities, open-ended mutual funds, bond ladders, etc. Therefore, we believe that investors will find the liquidity, transparency, distribution policy and growth potential offered in this closed-end structure to be competitive with these other structures.

And while it’s not exclusively a retirement vehicle, and 2024 is now the peak of the boomer generation reaching age 65, so we think these funds fit well in a retirement portfolio. In terms of the US and ASG specifics, we think that unique multi-manager structure… And again, only a third of closed-end funds are equity-backed. And so, we think within that structure, this multi-manager structure is unique.

And we believe that choosing either the large-cap or multi-cap version gives investors not only income, but also the potential for principal growth that will help them retire comfortably. And so, as fund managers, we try to provide manager selection, due diligence, rebalancing, ongoing monitoring and an occasional replacement of portfolio managers.

And we believe this allows investors to spend more time with the ones they love, doing the things they love to do and that are important to them. So we think both US and ASG should be considered by investors looking for income and growth. And the last point I’ll make about multi-manager structures is to emphasize why consistency is so important. In my mind, it is for three reasons. First we talked about supporting the distribution policy.

The second is that we never know the holding period of our investors. And thus, we strive to achieve satisfaction among the maximum number of shareholders at all times. And then the final reason is behavioral. We know that retail investors underperform during the holding period because they sell low and buy high. Our manager selection rating tries to avoid these actions.

CEFA:

Rob, thanks for taking the time to share your thoughts with us today.

Robert Milas:

Thank you very much for having me.

CEFA:

And we want to thank you for tuning in to another CEF Insights podcast.