as of March 31, 2014
Fund Commentary
The Tax-Exempt Fund returned a strong 4.09% during the first quarter, outperforming its benchmark. Demand for municipal bonds surged following a difficult 2013, while large interest rate moves within the market were supportive. In addition, municipal supply was low during the quarter, with new issuance down 27% compared with already below-average issuance a year ago. And strong technical factors within the market led to the robust performance of municipal bonds relative to other fixed-income asset classes.

For the quarter, our decisions to increase the Fund’s duration, or interest rate sensitivity, at the start of 2014 and to utilize a broad maturity structure contributed to performance. Duration was 10%-15% higher than normal, which benefited returns. The Fund’s broad maturity structure added value with the municipal yield curve flattening as longer interest rates fell substantially more than short/intermediate rates. Our emphasis on higher quality municipals detracted from first-quarter performance as lower quality A and BBB bonds outperformed AAA and AA issues. We continue to focus on higher coupon bonds based on their potential to cushion the effect of increases in interest rates.

Municipal bonds remain an appealing asset class within fixed income as their tax-free yields currently offer attractive value even to investors in very low tax brackets. Going forward, we expect market volatility to continue throughout 2014, a backdrop that can aid a disciplined active relative-value management approach.
Investor Profile

If you are an investor who favors current income exempt from regular federal 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.

  • Maintain a dollar-weighted average maturity range, under normal circumstances, between 10 and 30 years. This segment of the municipal market, while potentially more volatile, also may provide higher yields than shorter-term securities.
  • 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 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.

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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