Tax-Advantaged Ultra-Short Fixed Income
as of December 31, 2013
Fund Commentary
In December, the Federal Reserve announced a much anticipated reduction in the extraordinary bond purchases under its program of quantitative easing. Treasury yields rose on the announcement, with two-year Treasury yields finishing up 0.06% for the quarter, while the three-year Treasury yield rose 0.16%. The increase in rates was more pronounced in three-year bonds, as investors began to discount the effects of the Fed’s forward guidance on the future path of short-term rates. The municipal yield curve reaction was muted, as yields on three-year tax-exempt bonds rose only 0.04% during the quarter, to the advantage of Fund investors. The municipal market tends to lag movements along the Treasury curve, responding more to immediate supply/demand factors than to Fed policy. While we anticipate that municipal yields will eventually rise commensurately, three-year municipal yields are now lower than yields on comparable Treasuries.

The Fund posted a return of 0.19% in the fourth quarter, outperforming its benchmark. The Fund’s one-year total return of 0.75% also outperformed the benchmark.

The Fund’s strategy continues to be to maintain duration near one year, primarily by holding fixed-rate two- and three-year municipal bonds balanced by a position in very short-term municipal floating-rate notes. Taxable corporate bonds are also utilized when the return net of tax exceeds the return on tax-free municipal bonds. Taxable bonds made up approximately 35% of the portfolio in the fourth quarter.
Investor Profile

If you're seeking an investment that may generate higher yields than money market funds with less volatility than short duration bond funds, this Fund may be appropriate for you. The Fund is intended for investors with an investment horizon of at least one year who are seeking to move a portion of their money market fund assets.

The Fund is not a money market fund, which maintains a $1.00 NAV, and the Fund's share price will fluctuate with its returns.

  • Seek to provide investors in higher tax brackets more after-tax yield than a money market fund with potential for capital appreciation.
  • Strive to maximize after-tax return by pursuing best net after-tax yield and total return opportunities in both taxable and tax-exempt securities.
  • Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years. Also manage Fund in an effort to have an average portfolio quality of A or better, with all securities to be investment grade.
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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.

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.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.