Overcoming a wide range of potential obstacles, U.S. stocks turned in a solid 2012, as the S&P 500^® Index gained 16.00 percent for the year. The first and third quarters—with returns of 12.59 percent and 6.35 percent, respectively—propelled the index to its best year since 2009, when it was in rebound mode after the 2007-08 financial crisis. Moderate losses of 2.75 percent and 0.38 percent in the second and fourth quarters, respectively, kept the index from an even stronger year. Other major indices also advanced, with the NASDAQ Composite Index returning 17.45 percent and the widely followed Dow Jones Industrial Average (DJIA) returning 10.24 percent.

The gains came despite a global macro environment with ample reasons for investors to be wary. Among the worries were the ongoing financial crisis in Europe, fears of a hard economic landing in China, continuing high unemployment and lower consumer spending in the U.S., the uncertainty of a presidential election year, and the fiscal cliff debate in Washington. But, coming off a good fourth quarter of 2011, the S&P 500^® Index started the year with its strongest first quarter return since 1998. The index continued to advance until hitting a waterfall sell-off in May, sparked by J.P Morgan’s announcement of a multi-billion dollar trading loss in London, anemic readings on the U.S. economy, and continued struggles with massive sovereign debt and weak financial institutions in the Euro Zone. While some of these same issues simmered beneath the surface in the third quarter, investors appeared willing to accept the risks, as they were heartened by central banks around the world stimulating their respective economies and, in the U.S., a stronger housing sector, higher consumer confidence and corporate earnings reports that exceeded expectations. Gradual but ongoing improvements in the U.S. economy were not enough to overcome worries over the outcome of the fiscal cliff debate in Washington, and stocks ended the fourth quarter with moderate declines. Although not as severe as it was in 2011, volatility continued to roil stock markets in 2012, as an upwardly

trending market was hit with sharp sell-offs in May and October-November.

For investors in Liberty All-Star Equity Fund, it was a rewarding year. The Fund returned 14.72 percent with shares valued at net asset value (NAV) with dividends reinvested and 20.94 percent with shares valued at market price with dividends reinvested. While the NAV reinvested return moderately lagged the S&P 500^® Index, it was just slightly behind the 14.97 percent return of the Lipper Large-Cap Core Mutual Fund Average. The Fund’s market price return was ahead of both the S&P 500^® and the Lipper benchmark, and more than double the return of the DJIA. The discount at which Fund shares traded relative to their underlying NAV was generally unchanged compared to 2011, ranging from as narrow as 9.2 percent to as wide as 15.3 percent.

The Fund outperformed in the first and fourth quarters, and was in-line with the S&P 500^® in the third quarter. The only detractor was a six-week period in the middle of the second quarter when financial stocks, in which the Fund was overweight, were hit hard and investors sought refuge in a few defensive sectors that, in the view of the Fund’s investment managers, were overpriced. Yet, in the fourth quarter financials outperformed and the Fund benefited from its overweight position to the financial sector. For the fourth quarter, the Fund ranked in the 21st percentile of peer funds in the Lipper Large-Cap Core Mutual Fund Average but it finished in the 60^th percentile for the full year.

Looking long term, we are pleased that over the past 25-year period, the Fund has outperformed the S&P 500^® Index with shares valued at market price with dividends reinvested, returning an average of 10.01 percent annually compared to 9.71 percent for the S&P 500^® Index (and 9.34 percent for the Fund’s Lipper benchmark). We note that the Fund’s return over this period is net of fees, while the S&P 500^® return includes no fees (and would further point out that any investment in the S&P 500^® would incur fees).

Fund distributions totaled $0.32 per share in 2012. As shareholders may recall, the Fund’s distribution policy has been in place for 25 years and is a major component of the Fund’s total return. These distributions add up to $22.74 since that time. We would emphasize that shareholders must include these distributions when determining the return on their investment in the Fund.

Once again, in this annual report we offer a question and answer session with the Fund’s five investment managers. We believe you will find the comments of these leading investors to be both interesting and insightful. As we have also done in recent annual reports, we once again offer a brief summary of the Fund’s attributes (on pages 4 and 5). I urge you to revisit these attributes, as they help to make the Fund a unique and attractive investment vehicle.

We are pleased that the Fund performed well in 2012—a year in which concerns over issues both at home and abroad could have given pause to investors. But, continued strong company fundamentals and gradual improvements in the economy were sources of optimism and they ultimately carried the day. Volatility, albeit somewhat muted in 2012 compared to 2011, is often a challenge for actively managed funds, such as Liberty All-Star Equity Fund; but the professionalism of the Fund’s investment managers and its multi-manager structure led to a rewarding year for investors. We are optimistic about prospects for 2013, but whatever the market holds, please be assured that we will remain diligent and disciplined, and place our shareholders’ best interests first and foremost.

Sincerely,

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star^® Equity Fund

Investment Manager Roundtable

A look back at 2012 and a look ahead over the next 12-18 months from the Fund’s three value and two growth style investment managers. Plus thoughts on market volatility and professional insights about when to sell a stock.

Liberty All-Star Equity Fund’s five investment managers represent long experience, deep knowledge, a proven track record and, given that they represent both growth and value styles of investing, a broad point of view on the stock market and equity investing generally. Thus, once again, we are grateful to be able to call upon this resource to provide Fund shareholders with commentary and insight. The Fund’s Investment Advisor, ALPS Advisors, Inc., serves as moderator of the roundtable. Participating investment management firms, the portfolio manager for each, and their respective styles and strategies are:

CORNERSTONE CAPITAL MANAGEMENT LLC

Portfolio Manager/Thomas G. Kamp, CFA

President and Chief Investment Officer

Investment Style/Growth – Cornerstone evaluates stocks that its research identifies as offering underappreciated opportunities for growth as defined by one or more of their metrics. Stock selection is further based on the fundamentals of revenue, earnings, cash flow, and management depth and credibility.

MATRIX ASSET ADVISORS, INC.

Portfolio Manager/David A. Katz, CFA

President and Chief Executive Officer

Investment Style/Value – Matrix follows an opportunistic value-oriented investment philosophy. Matrix believes that value can be found in all sectors of the economy, and thus looks for investment opportunities beyond traditional value industries.

PZENA INVESTMENT MANAGEMENT, LLC

Portfolio Manager/Antonio DeSpirito, III

Principal and Portfolio Manager

Investment Style/Value – Pzena uses fundamental research and a disciplined process to identify good companies with a sustainable business advantage that the firm believes are undervalued on the basis of current price to an estimated normal level of earnings.

SCHNEIDER CAPITAL MANAGEMENT CORPORATION

Portfolio Manager/Arnold C. Schneider, III, CFA

President and Chief Investment Officer

Investment Style/Value – The firm practices a disciplined, fundamental approach to add value over time. Research focuses on uncovering new ideas and owning undervalued stocks before they experience a rebound in earnings and come to the attention of other investors.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Manager/Craig C. Blum, CFA

Managing Director

Investment Style/Growth – TCW invests in companies that have superior sales growth, leading and/or rising market shares, and high and/or rising profit margins. TCW’s concentrated growth equity strategy seeks companies with distinct advantages in their business model.

Please summarize what produced the best results for you in 2012 and what, in retrospect, didn’t play out the way you thought. As an active manager, did you find volatility and changes in market direction to be especially challenging in 2012? Let’s hear from the value managers to begin, starting with David Katz.

Katz (Matrix – Value): While the overall market had a good year, and we had positive results as well, it was nevertheless a challenging year. On the plus side, financial stocks had a very positive year, as their fundamental progress was finally recognized; their success last year vindicated our patience with them during a difficult 2011, a disconnected year where the group had improving fundamentals yet weakening stock prices.

On the other hand, we were frustrated by the outsized rewards to anointed tech winners such as Apple, Amazon and Oracle, and the denigration of such proven and successful businesses as Microsoft, Cisco and Corning. This created something of a binary performance situation in the market last year and also deepened some mispricings.

We found the “risk on, risk off” environment, reflecting a vacillation between macro concerns and fundamental analyses, to be challenging. We believe that it has created significant mispricings, which we expect to reverse in an environment driven by fundamentals.

DeSpirito (Pzena – Value): Recovery in deeply discounted industries such as financials—our largest sector weight—housing and defense were the largest contributors to performance during 2012. Heading into the year, there was continued pessimism surrounding the trajectory of the global economy. Sentiment improved, however, during the latter part of the year, as aggressive central bank intervention improved investors’ outlook, U.S. housing statistics turned up and cautious optimism emerged for resolution of the fiscal cliff. While we trimmed back our housing and defense exposure, we maintained our weight in financials. Financials began the year with such depressed valuations that even with strong performance in 2012, they remain our most discounted sector.

Positions that lagged during the year were companies where near-term trends in top-line growth were not favorable, even in spite of these companies’ leading

industry positions. Some of these companies reached absurdly low valuations. Although returns throughout the year were volatile and hinged significantly on macroeconomic events, we took advantage of the dips to stock up on leading businesses at very attractive prices.

Schneider (Schneider Capital Management – Value): The focus of our research to identify securities with low investor expectations that are temporarily trading at a substantial discount to their underlying business value was rewarded in 2012, especially in the home building and banking industries. Two of the strongest performers were KB Home, a geographically diversified homebuilder, and SunTrust Banks Inc., a regional bank with primary operations in the Southeastern U.S. Our investments in the energy sector were a drag on overall returns, but we believe that a return to more normal winter weather as well as the correction of supply and pricing imbalances will provide a solid platform for improved returns in 2013.

Short-term volatility and swings in market direction do not significantly impact our long-term, research-driven process, but we view it as a positive in general as it generates more investment opportunities.

Growth managers, what worked, what didn’t in 2012?

Blum (TCW – Growth): As a group, our information technology holdings produced our best results in 2012. In fact, our top three contributors were IT names Apple, Salesforce.com and ARM Holdings. Although we recognized the slack in the economy, we were surprised by the margin compression in two long-held transportation stocks C. H. Robinson Worldwide and Expeditors International of Washington. We thought volume growth would be tepid but the magnitude of the continued margin compression was disappointing.

The key difficulty in today’s market is not the existence of volatility, but rather the fact that policy response is often a bigger driver of that volatility than true fundamentals. We have assumed this type of environment would persist leading to our balance between offense and defense in the portfolio over the last few years.

Kamp (Cornerstone – Growth): Cornerstone’s best results in 2012 were produced in the healthcare sector, led by Gilead Sciences. Gilead’s stock was up 85 percent as its acquisition of Pharmasset brought a hepatitis C virus drug that should quickly gain market share when it is approved. Cobalt International was also a strong performer as its oil discovery efforts off the coast of Angola produced exciting results. Apollo Group, a for-profit education company, was a stock that did not play out as we thought, as the inflection point of any turnaround continues to get pushed back while creating a deeper

earnings trough. Technology company Acme Packet and Chinese Web services company Baidu were two stocks in our technology sector that underperformed. Cornerstone was impacted by the volatility of the market as our very strong first quarter was offset by weak results from March through July. We finished strong in the last month of the year but were not satisfied with our small relative annual outperformance given that our style tends to lend itself favorably to volatile markets.

Thank you very much. Something that investors frequently overlook is a manager’s sell discipline. They may understand the manager’s style and strategy, and the factors that lead to purchasing a stock; but the sell decision is often forgotten. Give us some insights into your sell discipline, please. Let’s stay with the growth managers and ask Craig Blum to lead off.

Kamp (Cornerstone – Growth): Cornerstone will trim or completely sell a given stock under three general conditions. Before identifying them, it helps to know that we invest based on what we call a “perception gap,” which exists when consensus expectations fail to recognize the true earnings power of a given company. This perception gap is an underappreciated opportunity. So, that said, we sell when:

Value style managers, how about your sell discipline. Arnie Schneider, let’s hear from you first.

Schneider (Schneider Capital Management – Value): We invest in stocks where we believe business fundamentals will begin to improve in the next 12-18 months and lead to a strong earnings rebound. We generally have a 3-5 year investment horizon. Reasons to sell a current holding include:

Katz (Matrix – Value): Our sell discipline is a reflection of our buy discipline, in that both focus on the difference between a company’s current stock price and its “fair value.” As the company’s stock price rises to the level of its dynamic fair value, we consider selling. The exact sell price will depend on the prevailing environment as well as the company’s particulars.

Beyond a company reaching its fair value, we are constantly examining its business prospects, a stock’s timeliness and management’s commitment to shareholder value. Adverse developments in one or more of these could trigger a sale.

On the downside, while we do not employ a stop-loss mechanism, we will sell when there has been a significant erosion in fair value, driven by a decline in earnings power or margins, or where management has taken steps that we believe are detrimental to shareholders.

new, deeply undervalued names that have qualified for inclusion in our portfolios. We believe our sell discipline is instrumental to delivering long-term value for our investors.

In the current market environment, volatility seems to have widened the performance differential between winner and loser stocks, even when the fundamentals do not justify such wide differentials. Does this phenomenon affect your sell decisions? Do you consider such harsh treatment of stocks unreasonable when the fundamentals are still strong? Value and growth perspectives should be interesting. Let’s hear from the value side, starting with Tony DeSpirito.

DeSpirito (Pzena – Value): We agree that the market environment has been extremely unfriendly to companies that have announced disappointing revenues and/or earnings even if their underlying fundamentals are strong. Our whole investment philosophy, however, is to look beyond the here-and-now and focus on the long-term prospects for a business. We estimate the earnings potential of the business five years from now and base our valuation metrics and fair value estimates on that number. The only time we change that number is if we judge there has been a significant change in the underlying fundamentals of the business—either positive or negative. So, the short answer is that market volatility does not impact our sell discipline, and should the market treat a company harshly in spite of a favorable long-term outlook, we will view it as a buying opportunity.

Arnie Schneider and David Katz, your views please?

Schneider (Schneider Capital Management – Value): Our sell discipline, as previously described, is focused on industry and individual company fundamentals. The decisions to buy, hold or sell are not driven primarily by market volatility or any short-term valuation dislocations that may result. In fact, we consider using price volatility to our favor; when a stock we own declines in price for no fundamental reason, we may buy more. Conversely, when a stock we own has a dramatic rise in price that is not supported by the fundamentals, we may sell some of our position.

Katz (Matrix – Value): We have responded to volatility by opportunistically taking gains a little bit earlier than we might be inclined to do in a less volatile environment. We have done this in cases where we believe market perceptions can change quickly, and there is more exposure to a stock “round tripping” itself. We are also looking closely at the relative attractiveness of similarly-situated companies to ones we own, as volatility might have created a more compelling situation elsewhere.

It is certainly frustrating to see fundamentally strong companies being mis-valued. It requires patience, which can be painful in the short term, but the market will typically get it right eventually, especially with successful, strong businesses. If we like the business, and management’s stewardship of it, we are usually inclined to wait and will often times increase our position during weakness in anticipation of the market re-valuing the stock higher.

How about the growth point of view on volatility, starting with Tom Kamp.

Kamp (Cornerstone – Growth): This question speaks directly to Cornerstone’s “V-factor” trading philosophy, which is a vital piece of our investment process. This is a strategy that buys the dips or sells into strength with the crucial assumption that the price move was greater than the change in fundamentals. As the reward-to-risk ratio for individual stocks rises or falls through the normal volatility in the marketplace, we dynamically change the risk parameters of the portfolio. We build risk into the portfolio during periods of weakness by adding to positions in stocks with the highest reward-to-risk ratios and reducing our exposure to stocks with lesser reward-to-risk ratios. While we do not know where the bottom is while doing this, we are confident of the fundamentals. We are looking for that kick off the bottom driven by the market realizing the perception gap(s) that we had identified.

Blum (TCW – Growth): Our view on the current market volatility is that we welcome it. We believe it provides a real opportunity for true stock pickers to generate alpha, which we generally define as excess return over a benchmark.

As you look out over the next 12 to 18 months, what are the key trends that you will be focusing on, and what is a stock in the portion of the Fund’s portfolio that you manage that represents each? Craig, lead off for the growth style managers, please.

Blum (TCW – Growth): As we think about the next 12-18 months, we see a bevy of irreversible trends, including but not limited to the following: higher inflation, cloud computing and high data-rate wireless. With regard to inflation, we believe monetary inflation has already occurred due to the many rounds of quantitative easing by the Fed but that we are just starting to see inflation in goods. Although many investors think inflation is terrible for equities, we believe inflation can help stocks as companies with pricing power—a key characteristic that we look for—can adjust to higher inflation and pass along higher prices. While this theme is broadly represented in our portfolio, one name we’d highlight that you won’t find in many growth portfolios, is Silver Wheaton (SLW), a silver streaming company. Streaming is basically a form of

alternative financing for miners and the business model is characterized by high margins, high cash flow, limited ongoing capital intensity and more limited operational risks. The model works particularly well in silver because the majority of silver is produced as a by-product and not as the focus ore for the miner. Given SLW’s leverage to silver prices that comes without the exposure to higher production costs, SLW benefits from higher inflation. Yet, the company also benefits from periods of lower silver prices as financing options for miners become more scarce and streaming deals become more accretive to SLW. Cloud computing is another trend that we have invested in for years and that we see only getting bigger. Amazon and Salesforce.com are two obvious examples. A third trend is high data-rate wireless. It is no secret that with the ubiquity of smartphones, tablets and mobile devices, data growth is exploding. In fact, we think wireless network demand could increase 25 times over the next five years. American Tower, a wireless tower company, is a key beneficiary of this trend. The business model is also very attractive with very strong revenue and cash flow visibility resulting from long-term contracts of five to 10 years, with annual price escalators. Unique economics and incremental margins from tenant additions are robust and there are high switching costs for American Tower’s customers.

led us to an investment in Nike. Health insurer WellPoint is leveraged to the continuation, over the next 12 months, of the low utilization of healthcare. In the financial sector, we believe improving credit trends and improving loan growth will benefit credit card issuer Capital One.

David Katz, what’s a value manager looking at over the next 12-18 months?

We also believe that the market’s attraction to dividends will continue as a way of protecting against volatility. We see this applying to many high-quality and well-priced companies, including many that are in our portfolio. Johnson & Johnson and Procter & Gamble are two examples that should benefit from this trend.

Arnie Schneider and Tony DeSpirito, wrap it up for us, please.

Schneider (Schneider Capital Management – Value): We see the continuation of the housing rebound to be a key trend over the next 12-18 months. The supporting factors we see include:

The improving housing market will provide direct support to the banking and homebuilding industries, which we believe continue to have a long runway in front of them. We believe Toll Brothers among homebuilders and Regions Financial among banks are two names that will benefit in this environment.

DeSpirito (Pzena – Value): The single most important trend in today’s market is the dramatic valuation disparity between bonds and stocks, and within equities between those with stable earnings or high dividend yields, that are at or close to peak valuations, and many companies with cyclical earnings that remain depressed. Investors have shunned businesses that are exposed to the economic cycles, and particularly punished those that are undergoing near-term revenue challenges. A good example is Hewlett-Packard (HPQ) the world’s largest technology company by revenues. Although investors are concerned about the long-term impact of cloud computing and tablets on the company, not to mention internally-generated issues, we see a company with leading business franchises across a diverse range of technology products and services, a strong balance sheet, ample free cash flow, and the resources and strategic focus to meet these challenges. HPQ is the cheapest non-financial company in our investment universe, and is the largest holding in our portfolio. We would also hasten to add that there is a wide assortment of financial companies, ranging from banks to insurance companies to wealth managers, that fit this profile as well and that represent about one-third of our portfolio.

Many thanks to all for sharing excellent insights into the past year, the months ahead and your own investment decision-making.