US: Tech exposure and a solid 10% return (NYSE:USA)

Liberty All-Star Equity (NYSE: USA) is a compelling investment vehicle for investors looking to combine technology exposure with a high dividend yield.

USA is a closed-end equity fund that owns some of the biggest names in the technology industry in its portfolio and which has achieved attractive double-digit returns over the past decade. The closed-end equity fund offers investors a 10% dividend yield as it distributes dividends from capital gains and is a compelling investment option, in my opinion, for investors seeking exposure to AI.

Diversification, high passive income and exposure to technology are the three main reasons why investors may want to consider the Liberty All-Star Equity Fund for their passive income portfolios.

Investment portfolio and objective

The Liberty All-Star Equity fund invests in both growth stocks and value stocks in large companies, mostly in The US information technology sector. The main objectives of the fund are capital appreciation and income distribution to US shareholders.

The Liberty All-Star Equity Fund specifically aims to pay distributions on its shares equal to approximately 10% of its net asset value per year, making US primarily a passive income vehicle for investors. The fund’s distributions are paid primarily from long-term realized capital gains, and the fund’s quarterly dividends are taxed as ordinary dividends.

The most recent distribution is $0.18 per share per quarter, which equates to a dividend yield of 10.4%. The Liberty All-Star Equity Fund is, as I said, primarily comprised of US large-cap investments and manages approximately $2.0 billion in assets. The fund’s current expense ratio is 0.93%.

The interesting thing about the Liberty All-Star Equity Fund is that the closed-end fund combines technology exposure and diversification with recurring dividend income. The fund currently pays investors a 10% yield, paid quarterly, and investors could benefit from the fund’s explicit focus on artificial intelligence.

The majority of the company’s portfolio investments are in the Information Technology sector, which had a 22.5% portfolio weight, which includes a number of stocks that are poised to benefit from growing investment in AI. The second largest was the financial sector (21.1%), followed by health (15.1%).

Performance history

The Liberty All-Star Equity Fund has benefited from strong technology investment performance over the past year, delivering an 18.6% return on net asset value.

Long-term returns are also attractive as the fund has achieved NPV returns of 11.2% over the past decade. The benchmark for the Liberty All-Star Equity Fund is the Lipper Large-Cap Core Mutual Fund Average.

Breakdown of main holdings and AI concentration

The Liberty All-Star Equity Fund focuses primarily on the information technology industry, as we have just outlined. NVIDIA Corp. (NVDA), Microsoft Corp. (MSFT), Amazon.com (AMZN) and Alphabet Inc. (GOOG) are the top holdings for the closed-end fund, and Microsoft was the largest US holding with a 3.6% portfolio weight as of July 31, 2024.

The Liberty All-Star Equity Fund contains a significant number of investments that have exposure to artificial intelligence. Companies like Nvidia and Alphabet were big winners last year as they benefited from the corporate sector’s spending volume on GPUs that are specifically geared towards AI applications.

Nvidia recently clarified, to name just one example, that it expects its latest Blackwell chips to ship to customers at the end of the year, and that it expects billions in sales from its latest GPU.

Since Nvidia has a 3.4% weighting in Liberty All-Star Equity Fund’s portfolio, a continued performance of AI stock could support the growth of the fund’s net asset value in the future.

Discount at NAV

Liberty All-Star Equity Fund as of 09/11/2024 was $6.96, while the market price of the fund was $6.87, implying a discount to net asset value of 1.29%.

The Liberty All-Star Equity Fund has historically sold at both a premium and a discount to net asset value at different times, making it difficult to make a general statement about the fund’s valuation history.

Over the long term, I expect the Liberty All-Star Equity Fund’s net asset value to increase and sell at or near net asset value because the portfolio consists of investments in highly liquid large-cap stocks. NAV growth prospects are very good in my view as the company owns market leaders in the dominant IT sector.

What risks should investors be aware of?

Obviously, the Liberty All-Star Equity Fund is focused on technology companies and includes some of the most notorious names in the tech world, Nvidia, Microsoft and Alphabet. Thus, investors should recognize that the US closed-end fund primarily allocates investment funds to the cyclical technology sector, which exposes investors to considerable risk if the investor’s capital rotates into other sectors, for example if which technology falls out of favor with investors.

Additionally, the Liberty All-Star Equity Fund is primarily invested in pro-cyclical companies, so the US likely won’t be a great choice for investors during a recession.

My conclusion

The Liberty All-Star Equity Fund is a compelling choice for passive income investors because it combines the diversification, income and appreciation potential associated with the most dominant names in the technology industry.

In addition, the Liberty All-Star Equity Fund has produced attractive, double-digit returns over the long term, while the expense ratio is below 1%.

The Liberty All-Star Equity Fund can be an attractive investment option for passive income investors looking to gain exposure to the fast-moving information technology industry, particularly because it includes clear leaders such as Alphabet or Nvidia.

In addition, the Liberty All-Star Equity Fund is a compelling investment vehicle for investors looking to increase their exposure to the artificial intelligence theme that has captured the imagination of investors over the past year. Buy.