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Small Cap Core

as of 3/31/16

Fund Commentary

Although equities generally rebounded in the second half of the quarter, small-cap stocks lagged mid- and large-cap segments, despite the rally among riskier assets in March. Part of this reversal came at the expense of previously outperforming stocks. Specifically, the momentum of many higher quality stocks and more-defensive sectors reversed as the lower quality, more-cyclical industries rallied. Continued low interest rates and improvements in the commodities and emerging markets brightened the prospects of formerly beaten-down stocks in the materials and energy sectors.

The Small Cap Core Fund posted a total return of -0.61% for the quarter, compared with -1.52% for the Fund’s benchmark, the Russell 2000® Index. Despite headwinds from underperforming micro-caps and the relative weakness of higher quality stocks in March, the Fund benefited by generally avoiding some of the weakest segments of the market. Stock selection was strongest in the struggling healthcare sector, particularly within the underweighted and underperforming biotechnology industry. Stock selection in the consumer discretionary and energy sectors also aided performance. Holdings in the consumer staples and technology sectors weighed on results.

Micro-cap stocks (stocks of companies with market capitalizations of less than $250 million) underperformed, with the weakest performance coming from the energy and healthcare sectors. Although stock selection was positive within these micro-cap sectors, the overweight in general detracted from returns. Deeper valuation stocks (those with lower prices relative to earnings or book value) generally outperformed higher valued stocks, a trend that unfolded later in the quarter and reversed results from prior months and quarters.

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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