June 30, 2003 – When looking for growth stocks, quality is key, says Richard Johnson, manager of Columbia Special Fund/Z (CLSPX). Johnson targets companies with annual growth rates of 15% or higher, but he then looks closely at whether the growth is generated internally and/or through acquisitions. The manager likes companies that can fund their growth rates without raising outside capital.

Unlike some of his growth counterparts, Johnson believes investors shouldn’t ignore valuations, saying, “if we don’t like the valuations, we don’t buy.” Johnson’s flexible approach to growth also shows up in his interest in special situations, such as restructurings, spinoffs, management changes, or IPOs. But regardless of special situations, which make up about 15% of the fund, Johnson says he cares about valuations.

Johnson is also flexible about selecting individual stocks. When considering potential holdings, he focuses on the market from the top down and the bottom up. “You can come to the same conclusion through either methodology,” Johnson says. Although versatile, Johnson says he likes the “confirmation” of the bottom up because he has a “much higher chance of being right.”

Johnson’s multifaceted growth strategy appears to have aided his fund in recent market changes. For the first half of this year, Columbia Special fund rose 14.3%, versus 14.1% for the average mid-cap growth fund. Over the longer term, the fund has also outpaced its peers: It rose an average annualized 2.6%, versus 0.7% for its peers, for the five-year period through May.

The fund’s recent gains stem from an overweighting in health care and some retail holdings, along with an underweighting in technology, according to Johnson. These positions were particularly helpful in the third quarter of last year, and the first quarter of this year, the manager said.

Consistent with his flexibility, Johnson is currently readjusting his portfolio. Johnson continually monitors his holdings, but his annual turnover suggests he doesn’t shift the fund more often than the average mid-cap growth fund, according to Standard & Poor’s data.

Spurred by their recent gains, Johnson has been taking profits on his health-care holdings, including HMO, generic drug, and medical device companies. With the economy bottoming, Johnson has been moving into software, semiconductor and semiconductor capital equipment companies. He’s recently purchased Amphenol Corp`A` (APH), CDW Computer Centers (CDWC), Intuit Inc (INTU), and BMC Software (BMC).

While Johnson feels that a “fire hose” of liquidity is favoring economic growth, he cautions that if there’s only a modest upturn, this liquidity surge could cause problems down the line. Despite this concern, Johnson believes that scenario is “a small possiblity.”