High Yield Fixed Income
as of December 31, 2013
Fund Commentary
In a continuation of a trend that was in place for the full year, high-yield corporate bonds posted positive performance and outperformed the investment-grade bond market during the last three months of 2013. The quarter began with interest rates stabilizing at new levels, which attracted substantial cash inflows into the high-yield market. In combination with moderate new issuance, this created a positive supply/demand profile that helped to drive valuations higher. Macroeconomic data improved somewhat, political developments were generally favorable and financial markets became comfortable with the Federal Reserve’s expected reduction in accommodative monetary policy — all of which created a positive backdrop and contributed to a narrowing of yield spreads.

The High Yield Fixed Income Fund’s fourth-quarter return of 3.56% was in line with the 3.57% return of its benchmark. Lower-quality securities performed best in the quarter, thus our overweight position in securities rated CCC and our underweight in those rated BB contributed to performance. Overweight positions in the supermarket and life insurance sectors, along with an underweight in electric utilities, also were additive to returns. Detractors included overweight positions in real estate investment trusts and underweights to the consumer finance and building materials sectors.

Given the stable economic environment, along with reduced expectations for negative political events, we believe that interest rate fluctuation could represent the largest source of market volatility in the months ahead. Our market continues to feature stable credit fundamentals and a low default rate, both of which can support high-yield bond valuations at their current levels.
Investor Profile

If you are an aggressive investor seeking high current income and the potential for capital appreciation for a portion of your assets, you may find this Fund provides an attractive complement to a well-diversified portfolio. It is best suited for long-term investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations.

  • Invest primarily in high-yielding, lower-rated corporate debt. Lower-rated debt is commonly referred to as "junk bonds."
  • Take steps to properly manage downside risk by maintaining a broadly diversified portfolio.
  • Rely on our extensive credit research capabilities in an effort to manage risk and minimize defaults.
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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 February 24 with a record date of February 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.

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