“Mutual-fund investors have renewed their love affair with stocks. But, mindful of past heartaches, they aren’t going head over heels,” writes Karen Damato in today’s Wall Street Journal.

“Investors pumped $152.77 billion of new cash into stock funds last year, the strongest cash flow since 2000 and a reversal from $27.75 billion in withdrawals in 2002, according to figures released by the industry’s Investment Company Institute trade group. Last year, an additional $33.18 billion went into hybrid funds, such as ‘balanced’ funds, which hold both stocks and bonds.”

“Investors have continued pouring money into stock funds and stock-and-bond blends this month, fortified by year-end statements showing the strongest returns in years. Indeed, in the four weeks through Wednesday, stock funds tracked on a weekly basis by research firm AMG Data Services took in $21.4 billion in new cash — the highest four-week figure for that universe since March 2000.”

“The final figure for January could be “huge” and near record levels, says AMG President Robert Adler, since the Arcata, Calif., firm’s weekly statistics don’t include sales at industry giants Fidelity Investments, Vanguard Group and American Funds.”

“But much of the money flowing into stock funds in 2003 went into relatively conservative offerings, including broadly diversified U.S. and international-stock funds and the less-volatile funds that hold a mix of stocks and bonds. Investors’ choice of stock funds reflects a ‘tepid optimism,’ which is only to be expected after the pain of the three-year bear market, says Owen Concannon, an analyst with Financial Research Corp. in Boston.”

“Still, some investors are walking on the wilder side, at least with a portion of their stock-fund buying. Emerging-markets funds, which invest in the world’s developing nations, took in an estimated $3.7 billion in 2003, the highest inflow to that highly volatile category since $6.1 billion in 1997, according to Lipper Inc. Emerging-markets funds delivered an average return of 55.42% in 2003, among the highest stock-fund gains.”

“Some small-stock funds also have seen their assets surge, a product of both 2003 gains averaging more than 40% and heavy cash flows from investors. Swelling assets have prompted some small-stock funds to close their doors to new investors — a trend that is likely to continue if the funds’ performance continues to be strong. Rising fund assets make life more difficult for such funds because managers then must buy more shares of a stock in order to build significant positions, or turn to larger stocks to avoid accumulating an uncomfortably large portion of a small company’s outstanding shares.”