California Intermediate Tax-Exempt
as of June 30, 2014
Fund Commentary
During the period, bonds continued to rally as investors reacted to tepid economic growth and a large negative revision to first-quarter gross domestic product (GDP). Interest rates fell across the maturity spectrum and the yield curve continued to flatten as markets were untroubled by a slight increase in inflation. Tax-exempt bonds outperformed their Treasury counterparts, as municipals continued to profit from a decline in new issuance and regular inflows into the tax-exempt market.

In the second quarter, the California Intermediate Tax-Exempt Fund generated a solid return of 2.22%, for a 5.37% year-to-date total return. During the three-month period, we increased the Fund’s modified duration slightly by extending maturity. This positioning helped performance as the California yield curve flattened. With regard to structure, we continue to favor higher coupon bonds for their superior liquidity. Our credit bias for high quality debt has also been maintained. In light of the state of California’s credit upgrade to Aa3 by Moody’s, the Fund’s exposure to A-rated securities declined to only 10%. Additionally, throughout the quarter the Fund had no holdings of BBB-rated bonds and no exposure to Puerto Rico.

Going forward, we will closely follow the comments and actions of the Federal Reserve for significant changes to monetary policy. In addition, we will focus on tax-exempt supply and demand in the California market as we look for trading opportunities. As always, we will monitor the debate concerning municipal debt policy at the federal level.

Holdings are subject to change and current and future portfolio holdings are subject to risk.
Investor Profile

If you are an investor who favors current income exempt from federal income tax and who is looking for an investment intended to be exempt from California state personal income tax, this Fund may be ideal for you. It is particularly well suited for income-oriented investors in higher tax brackets willing to assume some risk. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

  • Concentrate our investments in California state-specific, investment-grade municipal instruments which are exempt from federal income tax and California state personal income tax while maintaining an average maturity, under normal circumstances, between three and 10 years.
  • Invest in high-quality securities, primarily investment-grade debt.
  • Select investments on the basis of their relative value with a focus on total 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 May 27 with a record date of May 23. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

Past performance is not indicative of future results. Institutional investor award winners are chosen by the editorial staff of Institutional Investor magazine based on their market intelligence, performance data and additional information received from the industry following a public call for nominations. Manager winners are also selected by the editors of the magazine based on the results of a survey conducted of U.S. institutional investors.

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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