Intermediate Tax-Exempt
as of March 31, 2014
Fund Commentary
For the first quarter, the Fund’s return of 2.55% exceeded that of the benchmark. Technical factors in the municipal marketplace have been very positive in early 2014. Specifically, new-issue supply was down 26% in the first quarter versus 2013’s already below-average level. On the demand side, fund flows were neutral, which was quite constructive relative to the outflows of 2013. At the same time, a broad range of nonfund market participants were busy taking advantage of tax-free rates that are attractive relative to most other alternatives within fixed income. Strong demand and light supply led to strong returns, and the yield curve responded in a “bull flattening” manner where longer rates rallied more than short rates.

The Fund’s relative performance benefited from decisions to start the year with a somewhat more aggressive stance with respect to overall duration and interest rate sensitivity, along with a broad maturity structure that performed well as the yield curve flattened. The Fund remains very high in credit quality with over 90% of holdings rated in the AAA or AA categories, which constrained returns to a degree as credit spreads tightened during the quarter. However, our duration stance, curve positioning and specific security selections more than offset this.

Duration was reduced to a more neutral level at quarter end, as supply may pick up in the second quarter. The Fund remains positioned with a tilt toward higher quality and is focused on higher-coupon structures with attractive risk/reward profiles.
Investor Profile

If you are an investor who favors current income exempt from regular federal 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. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

  • Maintain a dollar-weighted average maturity range, under normal circumstances, between three and 10 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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