as of December 31, 2013
Fund Commentary
Tax-exempt interest rate movements were mixed during the fourth quarter. Longer-term rates rose slightly while shorter rates were unchanged. These rate moves combined to push the municipal yield curve to near-record steepness. However, the rise in rates for tax-exempts was substantially smaller than for their taxable counterparts as technical factors — low new-issue supply in particular — and institutional purchases benefited the municipal asset class.

In this environment, the Tax-Exempt Fund returned 0.42%. During the period, the Fund benefited from the high quality and excellent liquidity characteristics of its portfolio holdings. Our emphasis on higher-coupon bonds also contributed to performance based on the lower volatility and higher current-income characteristics of these issues. Holdings in New York and California tax-exempt bonds performed especially well for the Fund. The outlook for the two states going forward also looks favorable as supply in New York and California is likely to be low, while reinvestment flows from maturing bonds and coupons in these states are forecasted to be high. During the period, as credit spreads widened due to continued selling pressure from mutual funds, we added to portfolio holdings in A-rated securities, though the Fund’s positioning in this credit category is still much lower than its overall investment “universe,” 18% versus 31%.

As we expect market volatility to remain high, we will continue to employ an active relative-value management style. We will also seek to capitalize on the generous tax-free income potential within the municipal bond market.
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 10 and 30 years. This segment of the municipal market, while potentially more volatile, also may provide higher yields than shorter-term securities.
  • 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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