Arizona Tax-Exempt
as of March 31, 2014
Fund Commentary
During the first quarter, bonds rallied as market expectations for the pace and timing of U.S. Federal Reserve (Fed) tapering under new Fed Chair Yellen remained stable. Interest rates declined as payroll growth disappointed despite a falling unemployment rate. In addition, the yield curve flattened considerably, with shorter rates roughly unchanged and longer rates declining appreciably, as muted inflation data did not warrant concern. Municipal bonds benefited from a notable reduction in new issuance and some positive inflows into mutual funds.

For the quarter, the Fund posted a total return of 3.23%. We reduced the Fund’s overall duration and corresponding interest rate sensitivity while maintaining interest rate exposure neutral to the benchmark. Our longer-dated holdings helped performance as the Arizona yield curve flattened. With respect to structure, we continue to favor higher coupons to enhance the Fund’s liquidity. Given tight credit spreads, we are maintaining a bias toward high quality. As of quarter end, the Fund had no holdings of BBB-rated bonds and no exposure to Puerto Rico.

We will continue to closely follow any impact on interest rates from changes in Fed policy and actions. In addition, we will monitor any debate at the federal level concerning the tax-exempt status of municipal debt. At the state level, we will focus on in-state demand as Arizona residents feel the impact of higher taxes.

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

If you are an investor who favors high current income exempt from federal income tax and who is looking for an investment intended to be exempt from Arizona state personal income tax, this Fund may be ideal for you. It is particularly well suited for income-oriented investors in higher tax brackets willing to assume 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.

  • Concentrate on investments in Arizona state-specific, investment-grade municipal bonds which are exempt from federal income tax and Arizona state personal income tax while maintaining an average maturity, under normal circumstances, between 10 and 30 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 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.

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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