as of December 31, 2013
Fund Commentary
At its December 18 meeting, the Federal Reserve announced that it would begin to taper its bond purchases under quantitative easing beginning in January. The result was upward pressure on longer-term interest rates that took 10-year Treasury yields above 3.00% by the end of 2013. The yield curve steepened, with the middle portion of the curve most impacted by rising rates while short-term rates remained more or less anchored.

The economic backdrop was generally supportive of higher rates as well. U.S. equities closed a stellar year with another strong quarter to reach all-time highs, and overall inflation expectations as reflected in Treasury Inflation-Protected Securities (TIPs) prices increased. U.S. non-farm payrolls came in above expectations despite a partial government shutdown to start the quarter that impacted government jobs, while the unemployment rate fell to 7.0%. Third-quarter Gross Domestic Product (GDP) growth was revised upward to 4.1%, well ahead of initial estimates of 3.6%, thanks to inventory growth and a boost in consumption.

The Fund’s return of -0.74% for the quarter modestly underperformed its benchmark. Our overweighting of mortgage-backed securities represented a slight detractor from overall performance, although we reduced the overweight during the quarter. The Fund’s positioning along the yield curve and overall stance with respect to portfolio duration also had a marginally negative impact on performance.
Investor Profile

If you're a conservative investor who prefers the income and quality assurance offered by government securities, you may find this Fund attractive. It is best suited for investors with relatively low-risk profiles and can provide a solid-core holding for income-oriented investors of all ages.

  • Invest primarily in securities issued or guaranteed by the U.S. government or by its agencies.
  • Select high-quality securities with maturities, under normal circumstances, between one and 10 years, with risk exposure managed in an effort to achieve reasonable returns.
  • Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
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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.

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.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.