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Small Cap Core

as of 9/30/15

Fund Commentary

Uncertainty about global growth, Federal Reserve (Fed) actions, and earnings sustainability contributed to a sharp sell-off in the U.S. stock markets. After a strong first half of the year, small caps, as represented by the Russell 2000® Index, reached all-time highs in June before starting a downward trend that picked up speed in August. Despite the Fed’s decision to hold rates steady, value stocks (typically more exposed to financials) outperformed growth among small caps; and despite their greater exposure to international business, large-cap stocks outperformed small caps, as investors shunned riskier assets.

The Small Cap Core Fund posted a total return of -11.27% for the quarter, compared with -11.92% for the Fund’s benchmark, the Russell 2000® Index. Stock selection in the lagging healthcare sector contributed to the Fund’s outperformance. The Fund had an underweight position in lower-quality biotechnology companies, which significantly underperformed after sharply outperforming in the prior two years. Stock selection was weaker in the technology sector, where underperformance was distributed across most industries, except software companies.

The Fund’s broad exposure to micro-cap stocks aided performance. These stocks outperformed the overall benchmark and they outpaced the micro-cap constituents in the benchmark by an even wider margin. Valuation was not a clear predictor of performance, as the highest and lowest price/earnings and price/book quintiles underperformed. More significant was the Fund’s underweight to stocks of companies without reported earnings or negative return on equity or low/negative profit margins. This positioning was consistent with our general aversion to lower-quality stocks.

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 seeking 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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