There was more good news for mutual fund investors in May as nine out of every 10 funds gained ground and only one of 32 Morningstar Canada Fund Indices was down for the month, according to survey results released Monday.

This marks the second positive month following a first quarter when 91% of funds were down and 26 of the indices were in the red. Overall, 92% of the more than 4,600 Canadian funds surveyedgrew in value during the month. Despite recent gains, more than half were still down for the year as of May 31.

“Gains in May were broad-based but generally smaller than those in April,” said Gareth Tingling, Morningstar Canada’s manager of fund research. “Funds investing in Canada tended to outperform last month. Part of this reflects the strength of the Canadian dollar. It serves to mute performance outside Canada as gains are converted back to our more expensive currency.”

Tingling said the rally likely will encourage some fund investors. “While there are indications that confidence is starting to return to stock markets, ultimately a sustained rally requires a sound economic underpinning and, so far, economic reports have been mixed,” he said.

“The biggest threat to recent gains is that the assumptions for growth in earnings have been too aggressive. There are those who point to the speed of stock market gains as proof of this. If economic growth does not end up ‘filling in’ the earnings forecasts with revenues, stocks that have appeared to be at a reasonable valuation will suddenly appear very expensive.”

Among the top fund categories for May, the Canada Science and Technology Fund Index was up 5.6%, followed by the Natural Resources Index at 5.3% and the Canadian Small Cap Equity Index at 4.1%.

At the bottom, the Latin American Equity Fund Index had the worst returns in May with a loss of 1.7%. Japanese Equity and U.S. Money Market were both flat for May.

Among the largest categories, the Canadian Large Cap Fund Index was up 3.5% while Canadian Equity gained 2.9%. Canadian Bond rose 2.8%, Canadian Balanced gained 2.6% and Canadian Dividend was up 2.5%. Global Equity was up 2.5% and U.S. Equity rose 1.5%. Canadian Money Market gained 0.2%.

CI Mutual Funds continued to have the most five-star funds with 27. On a percentage basis, and among sponsors with at least three top-rated funds, I.A. Michael Investment Counsel retained top spot. All three of its funds have five-star ratings.