Spotting Undervalued Gems: Why the Liberty All-Star Growth Fund's June Surge Signals a Sector Turnaround

The Liberty All-Star Growth Fund (ASG) delivered a 5.14% return in June 2025, its strongest monthly performance year-to-date, even as broader markets faced volatility. Beneath its headline gains lies a compelling narrative: the fund's strategic focus on undervalued growth sectors—Information Technology, Industrials, and Health Care—is positioning it to capitalize on emerging opportunities. Here's why investors should pay attention.

The Fund's June Performance: A Sector Play in Disguise

The ASG's June gains were driven by its exposure to high-growth sub-sectors, including AI-driven software, industrial automation, and health tech. While its year-to-date return (1.27%) trails the S&P 500, its portfolio's composition suggests it's primed for a second-half resurgence.

The fund's discount-to-NAV of -7.8% throughout June also creates a buying opportunity. For investors, this discount acts as a margin of safety, while the fund's 8% annualized distribution (paid quarterly) adds income appeal.

Information Technology: Overvalued Metrics, Hidden Value

The IT sector's cyclically adjusted P/E10 ratio hit 36.1 in June—a high by historical standards—yet pockets of undervaluation persist.

Growth Catalysts:
- AI Integration: Companies like Rapid7 (RPD), a cybersecurity firm with a DCF-derived fair value 43% above its stock price, are leveraging AI for threat detection. Its Detection & Response (DNR) segment now accounts for 50% of ARR, a growth lever underappreciated by the market.
- Cloud Evolution: Private cloud adoption is surging as enterprises seek cost control and security for AI workloads. The fund's exposure to cloud infrastructure providers like LPL Financial (LPLA)—undervalued by 24% per DCF analysis—highlights this theme.

Industrials: Tech-Driven Valuation Upside

The Industrials sector, often overlooked, is ripe for a turnaround. EBITDA multiples for firms with recurring revenue models and advanced technologies (e.g., 3D printing or predictive maintenance) have surged to 17.1x for $3-10M EBITDA businesses, while asset-heavy logistics firms lag at 9.6x.

Growth Catalysts:
- Industrial IoT: Sub-$100M firms with AI-driven automation are acquisition targets for conglomerates and private equity. The ASG's holdings in Taiyo Yuden (TSE:6976)—a supplier of automotive electronics with 34.9% earnings growth potential—reflect this trend.
- Defense Spending: Geopolitical tensions are boosting demand for aerospace components. The fund's exposure to defense-related industrials aligns with a sector projected to grow at 8% annually through 2028.

Health Care: M&A-Fueled Multiples and AI's Role

Health Tech valuations are breaking records, with AI-driven firms commanding revenue multiples of 6–8x (vs. 4–6x for peers). The ASG's 15.6% Health Care allocation is strategically positioned for this shift.

Growth Catalysts:
- Telehealth Maturation: Post-pandemic demand for virtual care has stabilized, enabling firms like Teladoc Health to monetize data. The fund's health tech holdings, including cloud-based diagnostics platforms, benefit from this secular trend.
- Regulatory Clarity: Value-based care reforms and Medicare expansion are reducing risk for innovators. Warner Music (WMG)—a non-traditional Health Care play here—exemplifies how cross-sector synergies (e.g., music therapy partnerships) can unlock value.

The ASG's Edge: Diversification and Active Management

The fund's closed-end structure allows its managers to overweight undervalued sectors while avoiding overhyped segments. For example, its 7.1% national industrial vacancy rate exposure balances against the sector's supply-demand imbalances.

Risks and Considerations

• Distribution Sustainability: The September 2025 distribution of $0.12/share relies on uncertain capital gains allocations. Investors should monitor tax notices.
• Discount Dynamics: The fund's -7.8% discount could narrow if NAV growth accelerates, but macroeconomic headwinds (e.g., rate hikes) could prolong it.

Investment Thesis: Buy the Dip, Play the Turnaround

The ASG is a contrarian bet on sector-specific undervaluations masked by broader market metrics. Investors seeking exposure to AI, industrial automation, and health tech without picking individual stocks can use the fund as a diversified vehicle.

Recommendation:
- Hold for the Long Term: The fund's multi-year growth catalysts—AI adoption, defense spending, and Health Care M&A—are unlikely to reverse soon.
- Monitor the Discount: A narrowing discount-to-NAV (below -5%) could signal a shift in sentiment, warranting a partial profit-taking.

In a market where growth is unevenly distributed, the Liberty All-Star Growth Fund offers a disciplined way to navigate undervalued opportunities—provided investors have the patience to let the catalysts materialize.