Evaluating the Attraction of the Liberty All-Star® Equity Fund Amid a 9.7% Discount to NAV and a Diversified, Manager-Driven Strategy

The Liberty All-Star® Equity Fund (NYSE: USA) has long been a subject of intrigue for investors seeking value opportunities in closed-end funds. As of November 2025, the fund trades at a 9.7% discount to its NAV, with a market price of $6.13 compared to an NAV of $6.79. This discount, while significant, raises questions about its sustainability and whether it presents an arbitrage opportunity for value investors. The fund's multi-manager strategy, which blends value and growth-oriented approaches, further complicates the analysis.

The Discount: A Historical Perspective

The 9.7% discount is not an anomaly for the Liberty All-Star Equity Fund. Over the past decade, the fund has traded at an average discount of approximately 14%, with a five-year average of 13%. Short-term fluctuations, however, have been more pronounced. For instance, in September 2023, the discount was a narrower -2.32%, while by October 2025, it had widened to 9.7%. This volatility reflects broader market dynamics, including shifting investor sentiment toward closed-end funds and macroeconomic pressures.

A critical factor exacerbating the discount is the fund's short interest, which surged by 192.3% in September 2025. This creates a self-reinforcing cycle: bearish sentiment drives down the price, widening the discount, which in turn attracts more short sellers. For value investors, this dynamic could represent an opportunity if the market's pessimism is misaligned with the fund's underlying assets.

Manager-Driven Strategy: Balancing Value and Growth

The fund's investment approach is structured around a multi-manager model, allocating assets roughly equally among five independent managers: three value-focused (Aristotle Capital Management, Fiduciary Management, and Pzena Investment Management) and two growth-oriented (Sustainable Growth Advisers and TCW Investment Management). This hybrid strategy aims to mitigate risk by diversifying across investment philosophies while maintaining a disciplined focus on long-term capital appreciation and income generation.

According to the fund's latest monthly update, the value managers target companies with attractive valuations, while the growth managers seek firms with strong earnings and sales growth potential. This balance is designed to stabilize returns across market cycles. However, the fund's performance relative to benchmarks remains mixed. Despite a managed distribution policy targeting 10% of NAV annually, the fund has historically underperformed the S&P 500 in total returns. This underperformance may contribute to the persistent discount, as investors compare its returns to those of more efficient index-tracking alternatives.

Arbitrage Potential and Value Investing Considerations

For arbitrageurs, the 9.7% discount suggests a potential mispricing. If the fund's market price converges toward its NAV, investors could capture gains. However, this depends on several factors: the fund's ability to maintain its distribution policy, macroeconomic conditions, and shifts in investor demand for closed-end funds. The fund's year-to-date NAV growth of 8.02% contrasts sharply with the market price decline of 2.48%, indicating that the discount has widened despite asset appreciation. This divergence highlights the importance of analyzing the fund's structural characteristics, such as its liquidity and redemption mechanisms.

Value investors may also consider the fund's sector allocations. Technology and financial services account for 46.05% of the portfolio, sectors that have experienced both volatility and growth in recent years. While this concentration could amplify downside risk during market corrections, it also positions the fund to benefit from sector-specific rebounds.

Risks and Caveats

The fund's discount is not without risks. Its multi-manager structure, while diversified, introduces complexity in tracking performance and accountability. Additionally, the fund's high yield-nearly 9%-is partly driven by its managed distribution policy, which may not be sustainable if asset values decline further. Investors must also weigh the fund's underperformance against broader market indices and assess whether the discount reflects genuine value or persistent operational inefficiencies.

Conclusion

The Liberty All-Star® Equity Fund's 9.7% discount to NAV presents a compelling case for value investors and arbitrageurs, but it is not without caveats. The fund's hybrid manager-driven strategy offers diversification benefits, yet its historical underperformance and structural challenges warrant caution. For those willing to navigate the complexities of closed-end fund dynamics, the current discount may represent an opportunity-if the market's pessimism proves temporary.

[1] Liberty All-Star Equity Fund posts Nov NAV, 9.7% discount [https://www.stocktitan.net/news/USA/liberty-all-star-equity-fund-november-2025-monthly-gj8sb8mcd3qc.html]
[2] Liberty All-Star Equity Fund [https://www.all-starfunds.com/usa]
[4] USA Liberty All-Star Equity, closed-end fund summary [https://www.cefconnect.com/fund/USA]
[7] USA: Nearly 9% Income, Narrow Discount And Decent Long-Term Performance [https://seekingalpha.com/article/4794399-usa-nearly-9-percent-income-narrow-discount-decent-long-term-performance]
[8] Liberty All-Star® Equity Fund October 2025 Monthly Update [https://www.morningstar.com/news/business-wire/20251114195891/liberty-all-star-equity-fund-october-2025-monthly-update]
[9] Liberty All-Star Equity Fund (USA) Stock Price & Overview [https://stockanalysis.com/stocks/usa/]
[10] USA Liberty All-Star Equity Latest Comments [https://seekingalpha.com/symbol/USA/comments]
[13] Liberty All-Star Equity Fund's (USA) Short Interest & Short Float [https://www.marketbeat.com/stocks/NYSE/USA/short-interest/]