Tax-Advantaged Ultra-Short Fixed Income Fund

Tax-Advantaged Ultra-Short Fixed Income

as of March 31, 2013

Yields on U.S. Treasury bonds remained within a narrow range during the first quarter. One-, two- and three-year Treasury rates began and ended the quarter at essentially the same levels. Yields for two- and three-year tax-free municipal bonds declined by six and seven basis points (0.06% and 0.07%) respectively, as demand for these bonds outstripped supply. In addition, an increase in the maximum federal tax rate from 35% to 39.6% boosted demand for tax-free municipal bonds. The Federal Reserve continued its stimulative policy during the quarter, keeping the federal funds rate close to zero, and purchasing Treasury and mortgage-backed securities to inject additional liquidity into the U.S. economy.

The Tax-Advantaged Ultra-Short Fixed Income Fund posted a 0.35% return for the first quarter, compared with 0.25% for the blended benchmark. The Fund’s one-year return was 1.08%, versus 0.61% for the benchmark.

Our primary strategy during the period was to purchase two- and three-year fixed-rate securities. We also participated in the tax-free municipal floating-rate note, or FRN, market, whose securities generally feature a coupon that resets above the one-week municipal index. Holding FRNs allows the Fund to collect a competitive tax-free coupon, with a minimal price decline should market rates rise. We continue to examine tax-free municipal bonds for purchase — though taxable bonds are also considered — after accounting for federal taxes at the highest bracket. The Fund’s duration positioning continues to be modestly long versus our one-year neutral target, as we anticipate the continuance of the Fed’s "lower-for-longer" easing policy.

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, which has a $250,000 initial investment minimum, 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.

Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' 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, 53.7% for California and 43.4% for national municipal funds.

**Per share paid out March 25 with a record date of March 22. 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.