as of December 31, 2013
Fund Commentary
The resolution of the federal government shutdown, strong economic growth and the Federal Reserve’s announcement of plans to taper its asset purchase program in January drove rates higher during the quarter. As the Fed moves away from quantitative easing and relies more on forward guidance, the market will increasingly focus on economic growth, inflation and fiscal policy in determining the future path of interest rates.

Calendar year 2013 saw the largest volume of corporate debt issuance in history. Both investment-grade and high-yield corporate issues continued to enjoy robust demand in the fourth quarter, with credit spreads tightening throughout. Driven by a search for yield in the low interest rate environment, investors continued to find corporate debt attractive. U.S. company balance sheets remain in good shape, with a record amount of cash. While leverage has been rising over the past year, record low interest rates have kept the cost at exceptionally low levels, providing investors with confidence that they will be repaid in a timely manner.

Against this backdrop, the Fund’s return of 0.75% outperformed the benchmark. The largest contribution to performance came from security selection, as Fund holdings appreciated significantly more than those held in the benchmark. Overweight positions in corporate bonds and commercial mortgage-backed securities along with underweights to residential mortgage-backed securities and U.S. Treasuries contributed significantly to the outperformance. The largest detractor from performance was the positioning of portfolio assets along the yield curve.
Investor Profile

If you are an income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market, through shorter-term maturities, then this Fund may be right for you. It offers a diversified portfolio of bond securities invested primarily in U.S. investment-grade debt.

  • Invest primarily in domestic investment-grade debt obligations with an average maturity, under normal circumstances, between one and three years.
  • Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
  • Emphasize securities and types of securities (such as Treasury, agency, asset-backed, mortgage-related and corporate securities) that we believe have the potential to provide a favorable return.
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Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' and Northern High Yield Fixed Income Fund's Average Duration is calculated using the modified duration formula. Other Northern fixed income funds show the option-adjusted duration. Duration is a measure of a bond fund's sensitivity to changes in interest rates.

*Distribution rate and tax-equivalent distribution rate represent the annualization of the Fund's distributions for the prior month ending on the date shown, including capital gain distributions. The 30-day SEC yield and tax-equivalent 30-day SEC yield represent the annualization of the Fund's net investment income, excluding capital gain income. The tax-equivalent distribution rate and tax-equivalent 30-day SEC yield are based on an assumed tax rate of 47.9% for Arizona, 55.7% for California and 43.4% for national municipal funds.

**Per share paid out March 24 with a record date of March 21. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.

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