ASG - ASG: Strong Yield And Long-Term Total Returns Makes This Fund Attractive

2023-03-15 18:51:12 ET

Summary

• When the bull market resumes, Liberty All-Star Growth Fund might be a good bet for income investors. However, the ASG fund remains an interesting choice even under a bearish market.
• ASG pays quarterly distribution and generates a strong yield. The fund has a targeted yield strategy which ensures a higher than usual distribution yields.
• Despite a negative total return of 41 percent during 2022, ASG’s annual average total return over the past six years was 60 percent higher than that of S&P.
• ASG is trading around $5, at a discount of almost 4 percent from its NAV.

~ by Snehasish Chaudhuri, MBA (Finance).

Liberty All-Star Growth Fund ( ASG ) is a closed-ended equity mutual fund ("CEF") that invests in growth stocks of companies across diversified sectors. This fund invests in a basket of equity positions and stays away from leverage and options. It pays quarterly distribution and generates a strong yield. The fund has a targeted yield strategy of almost 8 percent. But, the biggest attraction of this fund is its annual average total return, which stood quite high over the long run. Total returns for this fund have consistently been strong, although interest rate hikes have hit growth stocks hard, leading to lower year-to-date performance. This fund enables investors to gain exposure to growth-oriented stocks while enjoying almost double-digit distribution yield over the long run.

ASG Is A Well-Diversified Portfolio Managed By 3 Specialized Asset Managers

Liberty All-Star Growth Fund was launched and is managed by ALPS Advisers, Inc. The fund is co-managed by Congress Asset Management Company, Weatherbie Capital, LLC, and Sustainable Growth Advisers, LP. ASG seeks to attain long-term capital appreciation. To achieve this, the fund invests primarily in equity positions, and utilizes a diversified, multi-managed portfolio of small, mid-and large-cap growth stocks. ASG has an asset base of approximately $300 million, and expense ratio of 1.11 percent. The fund has a diversified portfolio, with almost 75 percent of investment made in common equities of companies from four of the most promising sectors - healthcare, industrial, financial, and information & communication technology ((ICT)).

Liberty All-Star Growth Fund was formed on March 14, 1986 and has been consistent with its investments. Up to 35 percent of ASG’s total assets are generally invested in U.S. government securities and repurchase agreements. ASG specializes in growth-oriented equity investments, utilizing three asset managers, each focusing on stocks with different market-cap. Weatherbie Capital, LLC manages small-cap growth stocks; Congress Asset Management Company, LLP takes care of mid-cap growth-oriented stocks; and for large-cap growth, ASG relies on Sustainable Growth Advisers, LP. Each asset manager is allotted one-third of its portfolio and allocations are rebalanced periodically.

ASG Has A Strategy Of Targeted Yield And Generates Strong Total Returns

Liberty All-Star Growth Fund benchmarks itself against the performance of NASDAQ Composite Index, Russell 3000 Growth Index, and the S&P 500 Index. The asset management company conducts in-house research to make its investments. It targets almost 8 percent annual distribution broken down to 2 percent each quarter based on ASG’s net asset value. This makes ASG a high-yielding fund irrespective of the market condition. While these distributions are expected to rise during strong market conditions, NAV also moves up. Just the opposite happens during a slowing or bearish market.

Trailing twelve months ("ttm") yield has been 9.15 percent. Average yield recorded by Liberty All-Star Growth Fund during the past eight years was 10.3 percent. The fund also stood out with respect to total returns. Annual average total return generated by ASG during 2016 and 2022 was exceptionally high at 27.55 percent. Even if we consider a negative total return of 41 percent during 2022, annual average total return over the past six years will still stay high enough at 21 percent. This is lucrative since the annual average total return of S&P during the same period was less than 13 percent. ASG also is quite consistent with its equity investments and manages with a turnover ratio of 31 percent.

ASG’s Top Investments Doesn’t Include the Most Popular Stocks & Segments

Significant investments by Liberty All-Star Growth Fund provides a very interesting picture. The fund didn’t go for usual stocks from financial, industrial and healthcare sectors. ASG’s top investments included financial exchanges MSCI Inc. ( MSCI ) and S&P Global Inc. ( SPGI ); environmental and facilities services companies Montrose Environmental Group, Inc. ( MEG ) and Casella Waste Systems, Inc. ( CWST ); water, hygiene, and infection prevention solutions and services provider Ecolab Inc. ( ECL ); managed healthcare firm UnitedHealth Group Inc. ( UNH ), Life Sciences Tools and Services firm Danaher Corp ( DHR ) and Thermo Fisher Scientific Inc. ( TMO ). Interestingly, this list doesn’t include any bank, insurance, pharmaceutical or biotechnology firms.

ASG’s top investments consist of a good number of technology-based stocks. Application and system software developers such as Workday, Inc. ( WDAY ), Microsoft Corporation ( MSFT ), SPS Commerce, Inc. ( SPSC ), Salesforce, Inc. ( CRM ), and Intuit Inc. ( INTU ) dominates its portfolio. Other notable investments of Liberty All-Star Growth Fund included technology consulting and services company Globant S.A. ( GLOB ), interactive media and services giant Alphabet Inc. Class C ( GOOG ), e-commerce and retail marketing giant Amazon.com, Inc. ( AMZN ); data processing and data outsourcing services provider Visa Inc. ( V ), and digital infrastructure developer Equinix, Inc. ( EQIX ).

Investment Thesis

No one knows when the Federal Reserve will lower interest rates, inflation will come down, and/or the market will bounce back. And when the bull market resumes, ASG might be a good bet for income-seeking investors. However, Liberty All-Star Growth Fund will otherwise remain an interesting choice even under the current circumstances. Its dividend distributions are based on appreciation or depreciation of the fund. A down market leads to lower dividends. If things go down from here, then its value-oriented exposure could hold up better. In case growth rebounds, then also ASG will deliver strong returns. Either way, investors will receive higher than usual distribution yields from ASG. Not to mention its targeted yield strategy of almost 8 percent. This strong yield is backed by an exceptionally high annual average total return.

Despite a negative total return of 41 percent during 2022, ASG’s annual average total return over the past six years was 60 percent higher than that of S&P. The fund has a well-diversified portfolio with almost 63 percent of its investments being made in three sectors which have high growth potentials. Due to innovative and revolutionary technologies, changes in industrial structure, and rise in demand for better healthcare facilities, equity stocks belonging to healthcare, ICT and industrial sectors are expected to generate above-average growth in the coming decade.

Liberty All-Star Growth Fund is currently trading around $5 and a discount of almost 4 percent makes it furthermore attractive. In my opinion, Liberty All-Star Growth Fund is one such example that probably may please both income-seeking investors and growth-seeking investors.

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