Northern Multi-Manager High Yield Opportunity Fund

Transcription

1 N O R T H E R N F U N D S Northern Multi-Manager High Yield Opportunity Fund 4Q'13 Attribution & Performance Must be preceded or accompanied by a current prospectus 2013 Northern Funds northerntrust.com

2 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Sub-Adviser Target Allocations Neuberger Berman, 40% Loomis Sayles, 30% DDJ, 30% Strategy Objectives: Add value through the combination of sub-advisers who are specialists in their respective styles. This approach should isolate the security selection skills of the sub-advisers as the primary source of value added for the Fund over time. Leverage a disciplined and consistent research process to identify subadvisers who show high probability of success. Maintain the target allocations of the sub-advisers while continuously monitoring the style and characteristics of the Fund and sub-advisers. By properly combining sub-advisers, we can reduce low conviction bets such as style and size and focus the risk of the portfolio on higher conviction bets the security selection skills of the sub-advisers. Portfolio Characteristics: Well diversified portfolio, benchmarked to the Merrill Lynch High Yield Master II Constrained Index. The Fund currently uses three sub-advisers with various investment approaches. Due to the diversification that characterizes the Fund, it may lag during unusually strong up markets while providing good capital preservation in down markets. Style characteristics are designed to be neutral to the Index. 2 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

3 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Sub-Adviser Target Allocation Role in Portfolio DDJ Capital Management, LLC 30% A concentrated bottom-up oriented strategy that specifically focuses on the middle market segment of the high yield universe in addition to leveraged loans. Loomis, Sayles & Company, LP 30% Opportunistic high-yield strategy employing a bottom up investment approach focused on attractively priced credits. The portfolio will provide exposure to out-of-benchmark sectors. The portfolio is designed to provide competitive performance in a broad range of market environments. Neuberger Berman Fixed Income Management LLC 40% Traditional high-yield strategy focusing on credit selection within the benchmark sectors. 3 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

4 Glossary Bond Risk: Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates. High Yield Risk: Although a high yield fund s yield may be higher than that of fixed income funds that purchase higherrated securities, the potentially higher yield is a function of the greater risk that a high yield fund s share price will decline. Yield to Maturity: The rate of return an investor can expect from a bond at the purchased price if it is held to the maturity date. It is assumed that coupon payments can be reinvested at this same rate until maturity. Average Coupon: The weighted average coupon rate of all securities in the portfolio. The coupon is the fixed payment portion of the security, or similarly, the rate of interest on the principal. Effective Duration: Measures the sensitivity of a security or portfolio to changes in interest rates. Effective duration is often expressed in years. When a portfolio has longer duration, there is greater interest rate sensitivity and risk. Average Life: The average number of years for which each dollar of unpaid principal on a bond remains outstanding. Once calculated, weighted average life tells how many years it will take to pay half of the outstanding principal. Quality Distribution: Credit quality ratings are compiled from two external rating agencies: Moody s and Standard & Poor s. We report the lowest rating of the two in the event there are any differences between them. If neither of these rating agencies has assigned a rating, the Fund will assign a rating of NR (non-rated security). The ratings represent the rating agencies opinions of the quality of the securities they rate. The ratings, expressed in Standard & Poor s nomenclature, range from AAA (extremely strong capacity to meet its financial commitment) to D (in default). Ratings are relative and subjective and are not absolute standards of quality. For more information about the ratings provided by Moody's and Standard and Poor's, please visit their websites at and respectively. 30-Day SEC Yield: The total amount of dividends and interest accrued in the past 30 days less fund expenses as a percentage of total fund assets. Yield will fluctuate as securities are purchased, sold and mature over time. Merrill Lynch High Yield Master II Constrained Index: An unmanaged, market value-weighted index that limits exposure to any given issuer and tracks the public high yield debt market. It is not possible to invest directly in an index. Sub-Advisor returns are calculated using the True timeweighted returns (TTWR) method which is based upon a time-weighted cash flow analysis and requires re-valuing the portfolio each time a net contribution occurs. 4 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

5 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Performance Performance as of December 31, 2013 Month Quarter YTD 1 Year 3 Years Inception to Date Multi-Manager High Yield Opportunity Fund - Inception 9/23/ Merrill Lynch High Yield Master II Constrained Excess Return Annual Expense Ratio: Gross, 1.17%; Net, 0.90% Loomis Sayles - Inception 9/ Merrill Lynch High Yield Master II Constrained Excess Return Neuberger Berman - Inception 7/ Merrill Lynch High Yield Master II Constrained Excess Return DDJ Capital - Inception 9/ Merrill Lynch High Yield Master II Constrained Excess Return Returns quoted represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher. Visit northernfunds.com for returns current to the most recent month-end. Since inception returns for periods greater than one year are annualized. Sub-adviser returns are represented gross of Fund expenses. Net expense ratio reflects voluntary expense reimbursements by the Fund s investment advisors that may be changed or terminated at any time. See the Appendix for additional disclosure about performance. Please see the Glossary slide for a discussion of the calculation method used for underlying sub-adviser performance. The Fund benchmark is the Merrill Lynch High Yield Master II Constrained Index. 5 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

6 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Quarterly Performance Attribution Sub-Adviser Target Allocations Neuberger Berman, 40% DDJ, 30% Multi-Manager High Yield Opportunity Fund as of December 31, 2013 Investment-grade Corporate 2.2% Securitized 2.5% Bank Loans 4.4% Emerging Market Debt 1.7% Loomis Sayles, 30% High-yield issues outperformed investment-grade bonds during the fourth quarter, as lower-quality credits registered the highest returns. Supported by improving U.S. economic data and a rising stock market, high yield produced positive performance for the quarter led by CCC bonds, which outperformed the B and BB-rated sectors. Credit risk remained low compared to historical levels and ratings agencies continued to forecast a default environment below the long-term average of 4.8%. Issuers took advantage of this environment and extended maturity through reissuance. For the quarter, the BofA Merrill Lynch High Yield Master II Constrained Index gained 3.5%. The Multi-Manager High Yield Opportunity Fund finished the quarter behind the benchmark with a return of 3.2%. Fund underperformance was driven by sub-adviser Loomis Sayles, due to their yield curve positioning. The portfolio s exposure to non-u.s. dollar assets also represented a drag on relative results. For calendar year 2013, the Fund returned 6.7% compared with the benchmark return of 7.4%. High Yield Corporate 78.7% High Yield Corporate 98.9% Foreign (non-dollar) 1.7% Convertibles 4.0% Treasuries 0.3% Cash Equiv. 4.3% Merrill Lynch High Yield Master II Constrained Index as of December 31, 2013 Investment-grade Corporate 1.1% Emerging Market Debt 0.1% Foreign (non-dollar) 0.0% 6 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

7 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Portfolio Characteristics High Yield Opportunity Fund Merrill Lynch High Yield Master II Constrained Index Yield to Maturity (%) 5.9% 6.4% Average Coupon (%) 7.1% 7.4% Effective Duration (Yrs) 4.1% 4.1% Average Life (Yrs) 5.6% 5.2% Number of Holdings Day SEC Yield (with waivers) 5.8% Day SEC Yield (without waivers) 5.6% -- 5 Largest Holdings (ex Govt) % of Fund FORESIGHT ENERGY LLC 1.5% HARBINGER GROUP INC 1.4% CLAIRES STORES INC 1 1.2% BIOMET INC 1.1% RCN TELECOM SERVICES 1.1% Total* 6.4% *The Total column may not sum exactly due to rounding. Portfolio composition may change at any time. 7 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

8 Northern Multi-Manager High Yield Opportunity Fund (NMHYX) Sector & Quality Exposures Sectors High Yield Opportunity Fund Merrill Lynch High Yield Master II Constrained Index Over/Under High Yield Corporate 78.7% 98.9% -20.2% Investment-grade Corporate 2.2% 1.1% 1.1% Securitized 2.5% 0.0% 2.5% Bank Loans 4.4% 0.0% 4.4% Emerging Market Debt 1.7% 0.1% 1.6% Foreign (non-dollar) 1.7% 0.0% 1.7% Convertibles 4.0% 0.0% 4.0% Equity 0.3% 0.0% 0.3% Treasuries 0.3% 0.0% 0.3% Cash Equiv. 4.3% 0.0% 4.3% Total* 100.0% 100.0% 0.0% *The Total columns may not sum exactly due to rounding. Portfolio composition may change at any time. High Yield Opportunity Fund Merrill Lynch High Yield Master II Constrained Index Over/Under Quality BBB> 8.4% 0.4% 8.1% BB 24.2% 36.4% -12.2% B 42.2% 43.2% -1.0% CCC or below 23.0% 19.9% 3.1% Not Rated 6.5% 0.2% 6.4% Total* 100.0% 100.0% 4.3% 8 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

9 N O R T H E R N F U N D S Sub-Adviser 4Q'13 Performance Review DDJ Capital Management, LLC Pages Loomis, Sayles & Company, LP Pages Neuberger Berman Fixed Income Management LLC Pages

10 DDJ Capital Management Quarterly Performance Attribution Neuberger Berman, 40% Sub-Adviser Target Allocations Loomis Sayles, 30% DDJ, 30% Relative Over/(Under) Weights versus the Index 8.0% 5.7% 6.0% 3.5% 4.0% 2.0% 2.0% 0.0% -2.0% -1.1% -0.1% -4.0% -6.0% -8.0% -10.0% -12.0% -10.0% DDJ Capital performed in-line with the Merrill Lynch High Yield Master II Index for the quarter. Attribution by quality tier shows that security selection and positioning had a small positive impact on relative performance. Sector attribution for the fourth quarter reveals that while security selection added value, two headwinds for performance were sector positioning and the portfolio s small cash holding. From a quality standpoint, selection in B3 rated holdings detracted from relative performance while selection in B1 rated holdings added value. Lastly from a ratings viewpoint, the account continued to derive a positive benefit from its consistent overweight to CCC rated issues and significant underweight to B2 rated paper. From a sector standpoint, the portfolio s industrial and telecommunications holdings outperformed those of the Index while consumer cyclical positions underperformed Index peers. A zero weight in the utility sector and underweight of the energy sector were the largest detractors from relative performance during the quarter. DDJ believes that the continued accommodative policy by monetary authorities, both in the U.S. and globally, will allow the current low default environment and robust refinancing market to persist. Accordingly, DDJ s strategy remains largely unchanged since last quarter. The manager continues to invest in short-dated paper as well as investing higher up in an issuer s capital structure. These less risky opportunities can be executed by allocating a larger percentage of the portfolio s capital to secured notes where there are adequate protections in place to mitigate potential downside risk. 10 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

11 DDJ Capital Management Portfolio Characteristics DDJ Merrill Lynch High Yield Master II Constrained Index Yield to Maturity (%) 6.3% 6.4% Average Coupon (%) 7.3% 7.4% Effective Duration (Yrs) 3.5% 4.1% Average Life (Yrs) 4.0% 5.2% Number of Holdings Largest Holdings (ex Govt) % of Portfolio FORESIGHT ENERGY LLC 5.1% HARBINGER GROUP INC 4.8% CLAIRES STORES INC 1 4.1% RCN TELECOM SERVICES 3.7% PEABODY ENERGY CORP 3.4% Total* 21.0% *The Total column may not sum exactly due to rounding. Portfolio composition may change at any time. 11 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

12 DDJ Capital Management Sector & Quality Exposures Sectors DDJ Merrill Lynch High Yield Master II Constrained Index Over/Under High Yield Corporate 88.8% 98.9% -10.0% Investment-grade Corporate 0.0% 1.1% -1.1% Securitized 0.0% 0.0% 0.0% Bank Loans 3.5% 0.0% 3.5% Emerging Market Debt 0.0% 0.1% -0.1% Foreign (non-dollar) 2.0% 0.0% 2.0% Convertibles 0.0% 0.0% 0.0% Equity 0.0% 0.0% 0.0% Treasuries 0.0% 0.0% 0.0% Cash Equiv. 5.7% 0.0% 5.7% Total* 100.0% 100.0% 0.0% Quality DDJ Merrill Lynch High Yield Master II Constrained Index Over/Under BBB> 0.0% 0.4% -0.3% BB 9.2% 36.4% -27.2% B 54.5% 43.2% 11.3% CCC or below 27.1% 19.9% 7.2% Not Rated 9.2% 0.2% 9.0% Total* 100.0% 100.0% 0.0% *The Total columns may not sum exactly due to rounding. Portfolio composition may change at any time. 12 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

13 Neuberger Berman, 40% Loomis Sayles Quarterly Performance Attribution Sub-Adviser Target Allocations DDJ, 30% 20.0% 10.0% 0.0% -10.0% -20.0% Relative Over/(Under) Weights versus the Index 13.4% 8.3% 5.5% 0.1% 3.8% 1.0% 6.2% -30.0% Loomis Sayles, 30% -40.0% -50.0% -39.2% During the quarter, Loomis Sayles underperformed the Merrill Lynch High Yield Master II Index by 0.3%. The portfolio s yield curve positioning and allocation to non-dollar paper were two headwinds over the quarter that led to the underperformance for the quarter. As yields rose across the Treasury curve during the fourth quarter, 3 year maturities experienced less upward pressure relative to 7-10 year maturities. The portfolio s underweight to 3 year issuances and overweight to 7-10 year maturities dragged down relative results. Within the nondollar sector, corporate holdings, particularly a single Brazilian energy name as well as the portfolio s exposure to Mexican homebuilders negatively impacted results. Security selection was additive over the quarter, particularly in the converts and high yield space. Within converts, Loomis sold some of their technology holdings given the strong outperformance of these positions while industrial holdings outpaced the bench. Going into 2014, Loomis expects the global economy to continue posting improved growth. The sub-adviser s optimistic outlook is exhibited in the portfolio s allocation to equity sensitive convertible debt positions, particularly securities in the biotech, technology and health care industries. The portfolio s nominal duration has come down over the quarter at a deliberately slow rate given their increasing clarity on U.S. monetary policy. Loomis s improved economic outlook and opinion on the Federal Reserve s easing measures will likely lead them to cut duration further over the coming months. Additionally, the manager is being cautious in the non-dollar space. They are seeing more opportunities in Mexico relative to Brazil given the expectation of new reforms by the government. 13 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

14 Loomis Sayles Portfolio Characteristics Loomis Sayles Merrill Lynch High Yield Master II Constrained Index Yield to Maturity (%) 5.6% 6.4% Average Coupon (%) 7.1% 7.4% Effective Duration (Yrs) 5.2% 4.1% Average Life (Yrs) 8.3% 5.2% Number of Holdings Largest Holdings (ex Govt) % of Portfolio FORD MOTOR CO 2.1% SPRINT CAPITAL CORPORATION 2.0% LUCENT TECHNOLOGIES INC. 2.0% ALLY FINANCIAL INC 1.6% ARCELORMITTAL USA INC 1.5% Total* 9.2% *The Total column may not sum exactly due to rounding. Portfolio composition may change at any time. 14 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

15 Loomis Sayles Sector & Quality Exposures Sectors Loomis Sayles Merrill Lynch High Yield Master II Constrained Index Over/Under High Yield Corporate 59.7% 98.9% -39.2% Investment-grade Corporate 1.2% 1.1% 0.1% Securitized 8.3% 0.0% 8.3% Bank Loans 0.0% 0.0% 0.0% Emerging Market Debt 5.5% 0.1% 5.5% Foreign (non-dollar) 3.8% 0.0% 3.8% Convertibles 13.4% 0.0% 13.4% Equity 1.0% 0.0% 1.0% Treasuries 1.0% 0.0% 1.0% Cash Equiv. 6.2% 0.0% 6.2% Total* 100.0% 100.0% 0.0% Quality Loomis Sayles Merrill Lynch High Yield Master II Constrained Index Over/Under BBB> 18.3% 0.4% 17.9% BB 28.5% 36.4% -8.0% B 31.0% 43.2% -12.3% CCC or below 18.5% 19.9% -1.3% Not Rated 9.4% 0.2% 9.3% Total* 105.6% 100.0% 5.6% *The Total columns may not sum exactly due to rounding. Portfolio composition may change at any time. 15 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

16 Neuberger Berman Quarterly Performance Attribution Sub-Adviser Target Allocations 10.0% Relative Over/(Under) Weights versus the Index 8.3% Neuberger Berman, 40% DDJ, 30% 5.0% 0.0% -5.0% 1.4% -0.1% Loomis Sayles, 30% -10.0% -15.0% -11.9% During the quarter, Neuberger Berman outperformed the Merrill Lynch High Yield Master II Index by 0.3%. Strong performance over the quarter was largely attributable to positive security selection from both a quality and sector standpoint. From a sector standpoint, holdings in the telecommunications and technology & electronics sectors were among the strongest performers, while positions in the utilities, retail and media-broadcast detracted the most from relative performance. From a credit quality viewpoint, selection in below BBB rated holdings were additive with BB rated positions contributing the greatest to relative results. The sub-adviser continues to maintain a risk-on positioning in the portfolio, which is exhibited in an increased overweight to CCC rated paper. They believe credit markets are fundamentally in good shape as company balance sheets remain in check, the borrowing costs of businesses have been reduced by aggressive refinancing, and the maturities of company debt have been extended. Furthermore, Neuberger believes the yield on the 10-year Treasury is now trading around fair value, so they do not expect rates to spike significantly higher causing a crimp in refinancing activity. 16 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

17 Neuberger Berman Portfolio Characteristics Neuberger Berman Merrill Lynch High Yield Master II Constrained Index Yield to Maturity (%) 5.9% 6.4% Average Coupon (%) 7.0% 7.4% Effective Duration (Yrs) 3.8% 4.1% Average Life (Yrs) 4.7% 5.2% Number of Holdings Largest Holdings (ex Govt) % of Portfolio BERRY PLASTICS CORP 1.4% EP ENERGY LLC 1.2% RR DONNELLEY & SONS CO 1.2% CHESAPEAKE ENERGY CORPO 1.2% VALEANT PHARMACEUTICALS IN 1.1% Total* 6.1% *The Total column may not sum exactly due to rounding. Portfolio composition may change at any time. 17 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

18 Neuberger Berman Sector & Quality Exposures Merrill Lynch High Sectors Neuberger Berman Yield Master II Constrained Index Over/Under High Yield Corporate 86.9% 98.9% -11.9% Investment-grade Corporate 2.5% 1.1% 1.4% Securitized 0.0% 0.0% 0.0% Bank Loans 8.3% 0.0% 8.3% Emerging Market Debt 0.0% 0.1% -0.1% Foreign (non-dollar) 0.0% 0.0% 0.0% Convertibles 0.0% 0.0% 0.0% Equity 0.0% 0.0% 0.0% Treasuries 0.0% 0.0% 0.0% Cash Equiv. 2.4% 0.0% 2.4% Total* 100.0% 100.0% 0.0% Merrill Lynch High Quality Neuberger Berman Yield Master II Constrained Index Over/Under BBB> 3.6% 0.4% 3.3% BB 32.1% 36.4% -4.3% B 41.2% 43.2% -2.0% CCC or below 23.1% 19.9% 3.3% Not Rated 2.4% 0.2% 2.2% Total* 102.4% 100.0% 2.4% *The Total columns may not sum exactly due to rounding. Portfolio composition may change at any time. 18 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.

19 N O R T H E R N F U N D S Appendix Disclosure of additional information 19

20 Appendix: Disclosures Past performance does not guarantee future results. Total return is based on net change in NAV, assuming reinvestment of all distributions. Since inception returns for funds less than one year old are not annualized. Sub-adviser returns are represented gross of Fund expenses. Returns of an index do not reflect the deduction of any management fees, transaction costs or other expenses. Direct investment in an index is not possible. This presentation is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any funds. Information should not be considered investment advice, a recommendation to buy or sell any security or an endorsement of any underlying sub-advisers investment strategies. There is no assurance that the securities discussed are still in the Funds or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions or holdings discussed was or will be profitable, or that the investment decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein. Portfolio sector and characteristics comparisons are provided to illustrate sector allocations and characteristics for each Fund/sub-adviser s strategy versus their respective benchmarks as of the date indicated. The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. In preparing this presentation we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Opinions expressed are those of the authors or individual investment managers and may not reflect the opinions of Northern Trust Corporation or its subsidiaries. Information is subject to change without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. All indexes are the exclusive property of their respective owners, all rights reserved. Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K.,NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. Shares of Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust. 20 Northern Multi-Manager High Yield Opp Fund: 4Q'13 performance review. See pg 20 for important disclosure information.