as of June 30, 2014
Fund Commentary
In the United States, economic growth returned following a disappointing first-quarter contraction. However, the acceleration in consumer spending that many anticipated has yet to materialize. Major central banks kept monetary policy accommodative during the quarter. The sharp first-quarter contraction in U.S. growth caused the U.S. Federal Reserve (Fed) to lower its economic forecast for the year. Nonetheless, the Fed noted continued progress in labor market conditions, and voted to continue tapering its bond purchases. The Fed reaffirmed its view that a highly accommodative monetary policy remained appropriate in order to support continued progress toward the goals of maximum employment and price stability.

Issuers in the investment-grade corporate bond market took advantage of tight credit spreads and declining interest rates to issue a record amount of debt for the first half of the year. The flood of new corporate supply was well received by investors, who continue to search for yield in the low-rate environment. Issuance in other investment-grade asset classes such as U.S. Treasuries, U.S. government agencies, mortgage-backed securities and asset-backed securities disappointed investor expectations. The large inflow of money into investment-grade strategies coupled with these supply shortfalls helped to keep interest rates low and credit spreads tight.

The Fund’s return of 2.46% for the quarter outperformed the benchmark. The Fund’s sector allocation and security selection were the largest contributors to performance. In particular, the Fund was overweight corporate bonds and commercial mortgage-backed securities, while underweighting U.S. Treasuries. The Fund’s yield curve positioning represented a less significant positive contributor.
Investor Profile

If you're a conservative, income-oriented investor who wants higher current income than that generally offered by the U.S. Government Fund and you're willing to assume moderately more risk in exchange, you may find this Fund suitable. This Fund can also be an appropriate choice for investors who want to broaden and diversify their fixed income portfolio.

  • Invest primarily in investment-grade domestic debt obligations with an average maturity, under normal circumstances, between three and 15 years, but may own, to a limited extent, securities of foreign issuers and non-investment-grade debt.
  • 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, 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 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.

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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