Liberty All-Star® Growth Fund's Tax-Efficient Distribution Strategy: A Deep Dive for Income Investors

Liberty All-Star® Growth Fund (ASG) has long positioned itself as a compelling option for income-focused investors, offering a structured distribution policy of approximately 8% of net asset value (NAV) annually, paid in four quarterly installments of 2% each, according to the fund's press release. The fund's latest distribution of $0.12 per share, declared for September 2, 2025, underscores its commitment to this strategy. However, the tax implications of these payouts-particularly the interplay of return of capital (ROC), ordinary income, and capital gains-require careful scrutiny for investors seeking to optimize after-tax returns.

The Mechanics of ASG's Distribution Breakdown

ASG's distributions are not directly tied to its net investment income or realized capital gains. Instead, they are fixed amounts designed to provide consistent yield, regardless of the fund's underlying performance, a point the fund reiterated in its press release. This structure means that when distributions exceed the fund's earnings and gains, the excess is typically classified as ROC. For example, in the November 15, 2024, payout, $0.092114 per share was designated as ROC, as shown on the fund's dividend and tax page.

While the exact 2025 breakdown for the September 2025 distribution remains pending year-end finalization, historical patterns offer insight. In 2024, portions of ASG's distributions were categorized as 100% long-term capital gains, per the fund's dividend and tax page, whereas earlier years saw mixed allocations, such as 72.72% long-term capital gains and 27.28% ROC in 2012. This variability highlights the fund's reliance on a blend of income sources, with ROC often serving as a tax-advantaged mechanism to sustain payouts during periods of lower realized gains.

Tax Implications: ASG vs. Traditional Income Funds

For tax-conscious investors, ASG's structure presents distinct advantages over conventional income-focused funds. Traditional funds often derive a significant portion of their distributions from ordinary income, which is taxed at higher marginal rates. In contrast, ASG's use of ROC and capital gains allows investors to defer or reduce taxable events.

1. Return of Capital: ROC is non-taxable in the year received but reduces the investor's cost basis in the fund, effectively deferring taxes until the shares are sold. For example, if an investor holds ASG shares with an adjusted basis of $10 and receives $0.12 in ROC, their new basis becomes $9.88. This strategy can be particularly beneficial for long-term holders, as it stretches the tax-deferred growth of their investment, according to the fund's dividend and tax page.

2. Capital Gains Efficiency: When ASG's distributions include long-term capital gains (as seen in 2024 on the dividend and tax page), these are taxed at lower rates than ordinary income. This contrasts with many traditional funds, where a larger share of payouts may be ordinary income, subject to higher tax rates, according to a FinancialModelingPrep analysis.

3. Reinvestment Flexibility: ASG's practice of issuing new shares for most distributions (rather than cash) enables tax-efficient compounding. Investors can reinvest ROC and gains without triggering immediate liquidity events, preserving capital for future growth, as noted in the fund's press release.

Strategic Considerations for Investors

While ASG's tax efficiency is appealing, investors must weigh several factors:
- Market Volatility: ASG's closed-end structure means its share price can trade at a discount or premium to NAV, affecting after-tax returns when shares are sold, a dynamic the press release also highlights.
- Economic Cycles: During periods of low realized gains, ROC may dominate distributions, further reducing near-term tax liability but signaling lower underlying performance, per the fund's dividend and tax page.
- Regulatory Risks: Changes in tax law could alter the advantages of ROC or capital gains, though ASG's structure has historically adapted to such shifts, as discussed in the FinancialModelingPrep analysis.

Conclusion: A Tax-Optimized Yield Play

For investors prioritizing consistent income with strategic tax planning, ASG's distribution model offers a nuanced edge. By blending ROC and capital gains, the fund minimizes the drag of ordinary income taxation, a key differentiator from traditional income vehicles. However, the lack of transparency in pre-year-end breakdowns necessitates patience and a long-term horizon. As the 2025 tax reporting season approaches, shareholders should monitor the final 1099-DIV details to refine their tax strategies. In a landscape where yield and efficiency are paramount, ASG's approach exemplifies how structured distributions can align with both financial and tax objectives.