Short-Intermediate Tax-Exempt
as of June 30, 2014
Fund Commentary
Economic data was mixed during the second quarter. Strong employment reports were offset by stagnant wages and downward revisions in first-quarter gross domestic product (GDP) growth, ultimately settling on -2.9% GDP. Inflation readings remained benign. The Federal Reserve restated its intention to keep monetary policy accommodative as it continues to taper its asset purchases. Investors rewarded both risk-based and fixed-income assets. This overall market backdrop, along with strong demand, light new issuance and declining Treasury yields, buoyed the tax-exempt market. The mismatch between supply and demand continued, as tax-exempt new-issue supply trailed the same period last year, and industry mutual fund cash inflows boosted already robust demand. Tax-exempt issues outperformed their Treasury counterparts along most of the yield curve.

For the quarter, the Fund returned 0.65%. The Fund’s broader maturity profile and yield curve positioning enhanced relative performance. In particular, the Fund benefited from being underweight the two- to four-year segment of the curve while being overweight seven to eight years as the yield curve flattened. Our longstanding emphasis on higher quality, more conservative sectors detracted from relative performance as credit spreads narrowed further. Nonetheless, we prefer the superior liquidity and lower volatility of higher quality credits. The Fund has less than 6% of its holdings in A-rated securities and holds no BBB securities or Puerto Rico bonds.

We expect second-half issuance to be slightly higher than in the first half of the year, and will look to take advantage of market dislocations and expected periods of elevated volatility.

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

If you are an investor seeking higher current income, but potentially less price volatility than the Intermediate Tax-Exempt Fund, with income exempt from regular federal income tax, you may find this Fund attractive. It is well suited for income-oriented investors in higher tax brackets who are willing to accept some risk of principal in exchange for higher yield potential. 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 one and six 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 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.

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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