Tax-Advantaged Ultra-Short Fixed Income
as of March 31, 2014
Fund Commentary
Through mid-March, tax-exempt municipal yields drifted lower and investors “clipped coupons.” An unusually cold and snowy winter appeared to stunt economic growth, although expectations for an improvement later in 2014 remained in place. Even the U.S. Federal Reserve’s (Fed) measured tapering of its bond-buying program, which it reduced to $55 billion per month after three $10 billion reductions in previous months, did not disrupt the general market calm. On March 19, however, Federal Reserve Chair Janet Yellen gave a real number — six months — as an answer to when the Fed might entertain an increase in short-term rates after the end of the tapering program. In the wake of her statement, rates on two- and three-year Treasuries rose to levels not seen since last September.

The Tax-Advantaged Ultra-Short Fixed Income Fund posted a 0.24% return in the first quarter, as income was strong enough to offset the price declines of late March. The Fund’s one-year total return was 0.63%, versus 0.47% for the blended benchmark. During the quarter, the portfolio’s floating-rate bond position cushioned price volatility as intended.

We maintained duration near one year, primarily by using fixed-rate two- and three-year municipal bonds along with municipal and corporate floating-rate notes. We utilize taxable corporate bonds when their after-tax yield exceeds the return on tax-free municipal bonds. Taxable bonds made up approximately 30% of the portfolio throughout the first quarter.
Investor Profile

If you're seeking an investment that may generate higher yields than money market funds with less volatility than short duration bond funds, this Fund may be appropriate for you. The Fund is intended for investors with an investment horizon of at least one year who are seeking to move a portion of their money market fund assets.

The Fund is not a money market fund, which maintains a $1.00 NAV, and the Fund's share price will fluctuate with its returns.

  • Seek to provide investors in higher tax brackets more after-tax yield than a money market fund with potential for capital appreciation.
  • Strive to maximize after-tax return by pursuing best net after-tax yield and total return opportunities in both taxable and tax-exempt securities.
  • Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years. Also manage Fund in an effort to have an average portfolio quality of A or better, with all securities to be investment grade.
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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.