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Small Cap Core

as of 6/30/15

Fund Commentary

Despite a slow start to the quarter, small-cap stocks outperformed large-cap stocks (according to Russell benchmarks). The continued strength of healthcare companies, led by the biotechnology industry, propelled riskier and less profitable companies and companies with higher valuations (high price-to-book ratios). Energy stocks trailed, but less so than in previous quarters, while more interest-rate-sensitive sectors, such as utilities and real estate investment trusts (REITs), lagged significantly. In contrast, non-REIT financial holdings expected to benefit from higher rates, such as banks, performed strongly.

The Small Cap Core Fund posted a total return of 0.05% for the quarter, compared with 0.42% for the Fund’s benchmark, the Russell 2000® Index. Stock selection was strongest within the consumer discretionary sector and weakest within the healthcare and financials sectors. Once again, the performance of biotechnology companies continued to skew results to favor higher valuation, lower-profitability (negative earnings and return on equity) and high volatility stocks within the small cap index. The Fund’s underweight in biotechnology primarily accounted for a significant portion of the Fund’s underperformance. The surge of non-REIT financials was not selective with regard to valuation or quality, and it resulted in weaker stock selection results among our banks, thrifts and capital markets firms. The Fund’s micro-cap exposure offset some of these detractors. Micro-caps outperformed in our broader small-cap universe, outperforming the Index’s micro-cap companies, which were weighed down by lagging energy and consumer discretionary companies.

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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