as of December 31, 2013
Fund Commentary
Stronger economic growth, the resolution of the federal government shutdown and anticipation of the U.S. Federal Reserve’s tapering announcement drove longer-term interest rates higher during the fourth quarter. Global economic data was mixed, and major central banks maintained their accommodative monetary policies. While the Fed announced that the first reduction in its quantitative easing bond-buying program would occur in January, markets took this news in stride given the Fed’s intention to hold its benchmark federal funds rate at exceptionally low levels for a considerable period.

Investment-grade and high-yield corporate issuers performed well in the quarter, as investors — driven by their search for yield in the low interest rate environment — continued to find corporate debt attractive. Business’ balance sheets remain in good shape, with record amounts of cash. While leverage has been rising over the past year, low rates have kept interest costs on corporate debt at very low levels. In turn, this has provided investors with comfort that they will be repaid in a timely manner.

The Fund returned 0.15% during the fourth quarter, outperforming the -0.14% return of the benchmark. The largest contribution to returns came from security selection, as the Fund’s holdings appreciated significantly more than those in the Index. Overweight positions in corporate bonds and commercial mortgage-backed securities, along with an underweight to mortgages and U.S. Treasuries, also made significant contributions to performance. The largest detractor from relative return came from our positioning along the yield curve.
Investor Profile

If you are a long-term, income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market while eliminating your exposure to non-investment grade debt then this Fund may be right for you. It offers a diversified portfolio of bond securities primarily invested in U.S. investment-grade debt.

  • Invest primarily in domestic investment-grade debt obligations with an average maturity, under normal circumstances, between three and 15 years.
  • Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
  • Emphasize securities and types of securities (such as Treasury, agency, asset-backed, mortgage-related and corporate securities) that we believe have the potential to provide a favorable 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 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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