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Small Cap Value

as of 12/31/17

Fund Commentary

The stock market reached new heights amid generally positive macro conditions. Although the small cap value segment, as represented by the Fund's benchmark, the Russell 2000® Value Index, finished at an all-time high, it lagged all other domestic headline Indices; small caps trailed larger caps, “value” lagged “growth.” The buoyant market lifted the less profitable, more volatile and more richly valued companies over more reasonably priced and higher quality stocks.

The Small Cap Value Fund returned 1.30% in the fourth quarter trailing its benchmark, the Russell 2000® Value, which returned 2.05%. December was particularly challenging, as investors appeared to reduce risk aversion significantly. Low quality stocks, as defined by our proprietary quality model and subsequently underweighted in the Fund, outperformed the higher ranked stocks.

Stock selection was weakest in the sectors with the highest returns; consumer discretionary, energy and consumer staples. Better stock selection within the real estate, industrials and materials sectors failed to counterbalance underperformance in other sectors. As intended, sector allocation was not a significant contributor to active returns. Companies without positive reported earnings or return-on-equity were more consistently rewarded by the market, in contrast to long-term norms.

Although short-term trends may be challenging to the Fund's investment focus, our conviction in the long-term success of the strategy —based on investing in reasonably priced, profitable small company stocks while seeking to avoid stocks with low quality characteristics — remains firm. We continue to apply our disciplined cost- and risk-efficient investment strategy, balancing return, risk and transaction costs, to achieve intended objectives.

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.

©2018 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.