Fund Investors Turned Prudent in December, Flows Show

Vanguard's stock and bond index funds top charts; Janus sags.
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Whether they're losing patience or gaining prudence, fund investors are cooling to cratering growth funds and warming to bonds and tamer stock funds.

In December, the two top-selling funds were the no-load

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Vanguard Total Bond Market Index and

(VTSMX) - Get Report

Vanguard Total Stock Market Index funds, according to data released by Boston fund consultancy

Financial Research

(FRC). For much of last year and 1999 most fund investors plowed their money into tech-heavy growth funds, but many of these funds followed tech stocks south. Rather than stop investing in funds, they're putting their money in less risky funds after a year when the

S&P 500

lost 9.1% and the tech-laden

Nasdaq Composite

lost nearly 40%.

Last month investors sunk $6 billion more than they redeemed into stock funds, a big jump from November's $1.7 billion net inflows, but less than the $7.9 billion they invested in December 1999. The two top-selling index funds captured some $1.3 billion in net inflows in December, equal to about 22% of all funds' net inflows for the month. Hardly high-octane, the funds are designed merely to be inexpensive core holdings that rise and fall with the broad stock and bond markets.

The funds are "auto pilot" offerings pegged to broader indices. This suggests investors would rather join the market than get burned trying to beat it, as many did in 2000, a year when investment losses wiped out $316 billion in stock and bond fund mutual assets. The bond fund tracks the

Lehman Brothers Aggregate Bond Index

and the stock fund tracks the

Wilshire 5000 Index

, returning 11.4% and losing 10.6%, respectively, last year. The firm's

(VFINX) - Get Report

Vanguard 500 Index fund, which tracks the

S&P 500

, was the fourth-bestselling fund in December.

The bestseller list also included less aggressive broker-sold stock funds like

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MFS Investors Massachusetts Investors Growth Stock, American Funds'

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Growth Fund of America and the large-cap value

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Davis NY Venture fund. Each of these funds beat at least three-quarters of their peers in last year's tough environment.

The high flows to these tame funds are intriguing, but they're expected because investors tend to focus on fund categories that are gaining ground and shun those that are sagging. In 1999, for instance, the average tech fund gained a whopping 136%, according to

Morningstar

, and investors stuffed $32.8 billion into the growing category -- the previous record inflow was $4.4 billion in 1995.

But last year the average tech fund lost more than 30% and tech funds weren't among the top 10-selling fund flavors in December. In fact, flows also slowed to mid-cap growth funds and big-cap growth funds, which finished last year in the red as well. At the same time, cash flows to tamer large-cap blend funds that hold pricey growth stocks and cheaper value stocks rose 33%, and financial sector funds cracked the top 10 with a $747 million inflow compared to a $1.1 billion outflow in the first 11 months of last year.

Inflows to intermediate-bond funds rose 114% in December, to $439 million, placing 10th in sales for the month. The average fund in this category gained 9.5% last year, compared to a 9.1% loss for the S&P 500. The

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PIMCO Total Return fund, an intermediate-term bond fund actively managed by Bill Gross, was the sixth-bestselling fund last year, taking in more than $5.4 billion. The fund gained more than 11% last year.

Growth-fund titan

Janus

was the top-selling fund shop last year, with its retail stock and bond funds taking in $37 billion, according to FRC. The Denver firm's managers rode big bets on many of the same tech and telecom stocks in 1999 to a more than 80% average gain. After closing several funds due to steep inflows, many of these stocks tumbled and took the funds with them. December was the firm's fourth consecutive month of net outflows.

Investors withdrew $1.1 billion more than they invested in the firm's retail stock and bond funds, which had assets of $164.1 billion in December, according to FRC data. If the firm continues to see outflows, value shop

Franklin Templeton

could take its place as the country's fifth-biggest fund company. Franklin Templeton's outflows are ebbing, and the firm's retail funds were just $5 billion behind Janus at the end of last year.

Vanguard

, the nation's second-largest fund shop with nearly $500 billion in stock and bond fund assets, was the top-selling fund shop for the sixth straight month with eight funds in the top 20 sellers for December. The firm best known for low-cost index investing took in $22.2 billion last year.

In sum, mutual funds had net inflows of $175 billion last year, which is up 18% from 1999. Due to slipping market performance, however, the industry's net assets fell 3% last year to $4.4 trillion, according to FRC.

Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice. Editorial Assistant Dan Bernstein contributed to this article.