Mutual funds concentrating on Canadian income trusts led the pack for the second straight month in February. Overall, 76% of funds were in the red for the month, according to Morningstar Canada’s survey of more than 4,500 Canadian funds released Monday.

Morningstar says its Income Trust Fund Index has shown strong performance since the equity market slump began. It’s the third-best performing category in the last 12 months and lags only precious metals over the last two years.

“Despite the allure of this strong performance, investors need to understand what they are buying,” says Morningstar analyst Raju Khatra. “Income trust funds lagged their equity and bond counterparts during the stock market boom. History shows us they tend to perform poorly when interest rates are rising.”

Income Trusts have a different structure than bonds or stocks, and Morningstar’s holdings database shows that income trust funds continue to put most of their assets in the more traditional types of trusts such as real estate trusts. The newer “business trusts”, are much smaller players when it comes to mutual funds.

The Canadian Income Trust Fund Index was positive at 1.6%, followed by the Canadian Bond Fund Index at 0.7% and the Natural Resources Fund Index at 0.6%.

The Precious Metals Fund Index had the worst returns in February with a loss of 6.9%. It trailed the European Equity Fund Index and the International Equity Fund Index, both at -6.2%.

The Canadian Equity Fund Index was in the middle of the pack losing 1.2%. The Canadian Balanced Fund Index lost 0.8%. The Canadian Money Market Fund Index was positive at 0.2%, while the Global Equity Fund Index fell 5.3%.

The Canadian Bond Fund Index made the top three as it gained 0.7%. The U.S. Equity Fund Index lost 4.1%.

Overall, 10 of 32 Morningstar Fund Indices edged into positive territory during the month.

CI Mutual Funds Inc. continues to have the most five-star rated funds with 29 top-rated funds. On a percentage basis, I.A. Michael Investment Counsel Ltd., the manager of ABC funds, continues to lead the pack with five stars for all three of its rated funds.