High Yield Municipal
as of June 30, 2014
Fund Commentary
Following a disappointing first quarter, U.S. economic growth improved. Major central banks kept monetary policy accommodative during the most recent three-month period, as growth was muted versus investor expectations. The Federal Reserve continued to taper its bond purchase program and reaffirmed its view that a highly accommodative monetary policy was appropriate, while noting continued progress in the labor market. With that backdrop, interest rates ended the quarter lower.

The municipal bond market continued to post positive returns during most of the period. However, the municipal market lost some ground at the end of the quarter, as investors reacted negatively to the government of Puerto Rico’s passage of an act allowing the territory to restructure some of its public corporation debt. As a result, investment-grade municipals outperformed high-yield municipals. Flows into municipal mutual funds remained positive, albeit at a lower level.

The Fund outperformed its benchmark during the quarter with a return of 3.87%. In particular, the Fund’s concentration in health care and securities rated BBB contributed to performance. In the first two months of the quarter, performance lagged the overall high-yield municipal market as current coupon and discount issues outperformed the Fund’s generally higher coupon holdings. However, relative performance rebounded in the last month of the period in response to the Fund’s underweight in tobacco and at quarter end the Fund had no Puerto Rico holdings.

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

If you are an aggressive investor seeking a high level of current income that is largely free from federal income tax, you may find this Fund provides an attractive complement to a well-diversified portfolio. The Fund is best suited for long-term higher income investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

Philosophy
  • Concentrate primarily on municipalities that issue medium (rated A and BBB) and lower-quality debt (rated BBB and below). Lower-quality debt or high-yield securities are also commonly referred to as "non-investment grade" or "junk bonds."
  • Manage to a benchmark index of 65% investment grade and 35% non-investment grade bonds.
  • 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 June 24 with a record date of June 23. 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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