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Small Cap Core

as of 12/31/15

Fund Commentary

Against a backdrop of global growth concerns and the first Federal Reserve interest rate increase in more than nine years, small-cap stocks (Russell 2000® Index) eked out a gain in the fourth quarter but trailed larger-cap stocks. Investors generally preferred higher valuations over lower valuations, as sectors more heavily represented on the growth side of the small-cap market, such as health care and technology, were the winners. Consumer discretionary stocks failed to keep up, as consumer retail, particularly specialty and luxury good purveyors, lagged.

The Small Cap Core Fund posted a total return of 2.94% for the quarter, compared with 3.59% for the Fund’s benchmark, the Russell 2000® Index. Much of the Fund’s underperformance was due to stock selection within the healthcare sector, the best-performing sector within the Index. The outperformance of stocks identified by our models as “low quality,” which we typically underweight, was the most significant driver of relative performance, particularly within healthcare. Stock selection was also weak among consumer discretionary stocks, a lagging sector in the Index, where our holdings of better-quality companies declined more than the overall sector. Micro-cap stocks (companies with market capitalizations less than $250 million), to which the Fund has a modest overweight, outperformed but not enough to overcome the results of the Fund’s higher quality bias. Return differences attributed to valuation discrepancies between the Fund and its Index were modest, as intended, while biases to more profitable stocks weighed on performance, as the least profitable, lower margin stocks outperformed significantly.

Going forward, we will continue to invest in a diverse portfolio of small-cap stocks in a cost-efficient manner. We will continue to seek exposure to micro-cap stocks while attempting to avoid stocks with lower-quality characteristics, as indicated by our proprietary quality model.

Not FDIC insured | May lose value | No bank guarantee

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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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