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What are we looking for?

The world's debt market has climbed to about $100-trillion (U.S.) in size. We look for the global bond funds that turned out the best returns in the past three years.

The screen

We rank the 15 best performers among global fixed income funds in the three years to Jan. 31. U.S. dollar, segregated and duplicate versions of funds were excluded.

What did we find?

The low interest rate environment has many investors hunting for yield, but the chart's top performer cautions against taking on too much risk.

The Pimco Monthly Income fund posted a 16.3-per-cent return in the three years to Jan. 31., far exceeding the competition.

The fund's two key objectives are paying out consistent distributions, and capital appreciation.

"We don't want to stretch for yield to pay out that distribution, only to lose money," said Paul Reisz, a Pimco product manager who works on portfolio strategy. "We're trying to hit singles, not home runs."

The portfolio is invested in both high-quality, government securities as well as higher-yielding securities that generate distribution. The aim is to protect the portfolio against any slowdown, while also capturing any surprise upside.

Pimco starts by taking a view of the market. "Our baseline is that the global economy is muddling along with unprecedented central bank stimulus," Mr. Reisz said. If the investment manager were to give the world a report card grade, it would be a "C," since the world isn't dipping into a recession, but it's also not experiencing significant growth.

Last year the portfolio was helped by its investments in mortgages, primarily in the U.S., as well as Ireland and Spain and other places.

Pimco thinks there's the potential for 5- to 10-per-cent growth in real estate prices in the U.S., which should lead to reasonably good performance in that sector in the coming months, Mr. Reisz said. The fund is also investing in Australian government debt because real yields are about 2 per cent higher than North American government bonds, Mr. Reisz said. "Their economy is tied to the Chinese economy, and as that slows down, interest rates have fallen, creating a capital appreciation opportunity."

The fund has more recently played down its currency exposure, by bringing it down to zero to reduce volatility in the return and income streams.

Pimco has also reduced the fund's exposure to emerging markets, which have experienced significant outflows in recent months. The fund's emerging market weighting is hovering between 6 per cent and 7 per cent, but Mr. Reisz thinks that could increase in the future when there's more stability in that market.

The CIBC Global Bond A was the second-best performer in the chart with annualized gains of 7.2 per cent. The iShares U.S. Corporate CAD-Hedged gained 7.1 per cent.

Top 15 Global Fixed Income funds - 3-years to Jan 31, 2014

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