It is well known that investors' attitude toward risk changed immensely during and after the bear market of 2007-2008. The shift toward safer fixed-income choices and a reduced reliance on equity funds is seen in the flows data.

For example, in 2008, investors withdrew nearly $73 billion net from equity funds (after a net purchase of $179 billion the year before), and added $64 billion to taxable and municipal debt funds. The following year saw bonds continue to draw more attention than equities. A paltry $5 billion net was added to equities funds, while the pair of bond fund groups took in a whopping $465 billion net (all flow figures include ETFs).

Even today, while equity markets are in a position to possibly string together two years of double-digit gains, equity funds are attracting less than half of what's going into bond funds.

This preference for bond funds makes me wonder: Did investors do a good job picking funds?

We'll construct an analysis in quadrant form, where fund flows during 2009 are shown along the bottom axis (negative to positive) and performance in 2010 is along the side axis. (See chart.) For our purposes, when investors sold a fund that subsequently achieved above-average performance, they made a mistake. Likewise, when net flows are positive and the fund later posted above-average performance, investors collectively made a good decision. (It should be noted that we are excluding money market funds.) Using our chart below, what we'd like to see are more results in the upper-right and lower-left quadrant, and fewer in the upper-left and lower-right.

So what happened with flows and performance? It might come as a surprise to skeptics who doubt investors' ability to identify good buying opportunities: some of the hottest areas for flows in 2009 went to the better performers of 2010.

Of the estimated $465 billion net that fixed-income funds drew in 2009, approximately $43 billion went into funds located in Lipper's Short-Intermediate Investment-Grade Debt Funds classification. Fortunately for those investors, they put most of their money in the right place, since over $32 billion (of the $43 billion total) went into the upper-right quadrant for funds. Another $11.9 billion net went to funds in the group that were later below-average performers.

The biggest draw for 2009—Intermediate Investment-Grade Debt Funds—had total net flows of over $90 billion, and over half of that went to PIMCO Total Return Fund. Not only did that fund take in nearly $50 billion net for 2009, it also posted an 8.8% return, putting it in the top 25% of its peer group for 2010. Its sister portfolio, PIMCO Investment Grade Corporate Bond Fund, trailed far behind in flows, taking in about $3.1 billion net for 2009. But it turned out to be the better performer for 2010, gaining 11.3%.

To be sure, investors misjudged a few other areas. Large-cap value funds have seen outflows every year since 2007. And despite the attempts of some investors to kick-start a rally in large caps, poor decisions plagued the group.

We're only looking at the big picture here, but overall net flows in 2009 show that investors allocated nearly $91 billion more to 2010's top-half performers than they did to the bottom-half ($390 billion compared to $299 billion).