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Fund managers at Morningstar discuss where to find yield

How to generate income in a low-rate world was a major theme at the Morningstar Investment Conference in Chicago last week. Fund managers and strategists said that opportunities for yield exist but investors should be extra careful.

While the Federal Reserve is expected to raise rates later this year, that's not the case with the central banks in the Europe, Japan and the U.K.

"That should mean that there is opportunity to avoid big capital losses," JPMorgan Funds' chief market strategist, David Kelly, said. "There are slim pickings, I will admit. But I think there are better opportunities the further you get from the U.S. Treasury market."

Read MoreJPMorgan's Kelly: U.S. growth will be only 1.5%

You don't have to go overseas to diversify from U.S. Treasurys. Rick Rieder, BlackRock's chief investment officer of fundamental fixed income, told a Morningstar panel Friday that he liked municipal bonds because they are less correlated to Treasurys, which would fall in price as rates go up.

Rising rates offer a chance for bond investors to take advantage of the selloff. Marc Seidner, Pimco's chief investment officer of nontraditional strategies, said rising rates are great for bargain hunters. He compared buying bonds in a rising-rate environment to shopping on Chicago's Miracle Mile the day after Christmas.

Daniel Ivascyn of PIMCO in 2012
Steve Marcus | Reuters
Daniel Ivascyn of PIMCO in 2012

Still, the outlook for fixed income going forward is not as bright as it has been in the past. "The fixed-income party isn't over, but we have run out of food and beverages," said Anne Lester, senior portfolio manager at JPMorgan. BlackRock's Rieder warned that bonds could be riskier than stocks.

Investors should adjust their return expectations, said PIMCO's chief investment officer Daniel Ivascyn. "We are looking at a world where high-quality fixed-income returns are probably closer to the 2 to 3 percent range," he said.

Read MorePimco: A bright future after Bill Gross' departure

Ivascyn is looking to emerging markets but specific spots in those markets and not as an asset class. He said that Pimco likes Mexican government bonds and Brazilian inflation-protected securities as well as external debt and local interest rate markets where the firm can hedge the currency risk.

"We are taking a much less volatile form of emerging market exposure," Ivascyn said. "We do think it looks somewhat attractive in some cases versus traditional corporate credit risk, but again, we are being cautious and somewhat defensive."