Short-Intermediate Tax-Exempt
as of December 31, 2013
Fund Commentary
The municipal market performed well during the fourth quarter considering that it faced continued tax-exempt mutual fund outflows and steadily rising Treasury interest rates. Tax-exempt yields declined through six years while rising modestly beyond that point, leading to a steeper yield curve. The outperformance versus Treasuries was primarily driven by a positive supply/demand technical environment, as year-over-year fourth quarter new-issue supply was down 21%. The Federal Reserve announced a modest reduction in its quantitative easing program, while reiterating its commitment to keep overall monetary policy highly accommodative for a considerable period.

The Fund returned 0.27% for the quarter. We maintained a slightly defensive duration profile throughout the period, which represented a modest drag on relative performance as yields declined inside six years. We feel that a defensive approach is warranted given the potential for rising interest rate, should the economy continue to improve, and the Fed’s continued reduction of its asset purchases.

Holdings outside the benchmark maturity range detracted from relative performance as the yield curve steepened between five and seven years. We added exposure to the six-to-seven-year range to take advantage of incremental yield and what we believe are attractive total return opportunities. By contrast, we reduced exposure to five-year issues as we feel they are overvalued. The Fund’s underweighting of single-A credits detracted from relative performance as credit spreads narrowed. However, shareholders benefited as the Fund did not own Puerto Rico bonds or BBB-rated securities, both of which underperformed.
Investor Profile

If you are an investor seeking higher current income, but potentially less price volatility than the Intermediate Tax-Exempt Fund, with income exempt from regular federal income tax, you may find this Fund attractive. It is well suited for income-oriented investors in higher tax brackets who are willing to accept 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.

  • Maintain a dollar-weighted average maturity range, under normal circumstances, between one and six 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 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.

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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