Short-Intermediate Tax-Exempt
as of March 31, 2014
Fund Commentary
The municipal bond market delivered mixed performance during the first quarter, as yields fell sharply in longer maturities while increasing modestly among shorter-maturity issues. Declining Treasury yields, limited new-issue supply and solid demand helped to support the municipal market. Mutual fund cash flows, which had been negative for most of 2013, turned positive to start 2014. In addition, Puerto Rico successfully issued $3.5 billion of general obligation bonds, with nontraditional municipal investors such as hedge funds the primary buyers. The Fund did not participate in the deal, nor does the Fund own Puerto Rico bonds. The U.S. Federal Reserve (Fed) continued the measured reduction of its asset purchase program, but also hinted that short-term rates could reach 1% by the end of 2015. This action pressured shorter-term bonds and led to a flattening of the yield curve.

The Short-Intermediate Tax-Exempt Fund returned 0.45% during the quarter.

The Fund’s overweight in higher quality, more conservative sectors detracted from relative performance at a time when yield spreads narrowed on lower rated investment-grade issues. However, we believe that higher quality bonds provide superior liquidity and lower volatility. The Fund’s yield curve positioning enhanced relative performance, given that the curve flattened during the quarter. In addition, we maintained the Fund’s underweight within the three- to five-year maturity range, as we believe that this market segment offers lower total return prospects given the Fed’s stated plans. Lastly, we added to our overweight in six- to seven-year maturities to take advantage of yield curve steepness in this range.

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 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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