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Small Cap Core

as of 9/30/17

Fund Commentary

Small-cap stocks finally rallied to beat the larger caps in the last weeks of the third quarter, following the latest federal tax proposals. The market appeared to be holding an optimistic assessment of federal legislative success, a reprise of the sentiments that buoyed the market at the end of 2016. The boost was particularly strong for value stocks (though not enough to make up the big lead growth had for the quarter) and again helped lower quality stocks outperform.

The Small Cap Core Fund returned 5.15% versus the benchmark, Russell 2000® Index, of 5.67% for the quarter. More generally, lower quality stocks as defined by our stock selection models, outperformed. Stock selection within the healthcare sector was the most significant contributor to this quarter’s results, accounting for almost all the shortfall relative to our benchmark, the Russell 2000® Index.Within healthcare, an underweight to the strongly performing bio-tech industry, as well as the general outperformance of lower quality companies within the sector, explain most of the Fund’s quarterly relative results. Stronger stock selection within the consumer staples sector gave a boost to relative performance, but less strongly than needed to offset the weakness among health care stocks. Sector selection was not a meaningful contributor to performance this quarter.

While micro-cap stocks outperformed, and contributed positively, it was insufficient to overcome the outperformance of the larger, lower quality holdings. Profitability and profit margin were significant characteristics in explaining return differences; the least profitable companies and companies with the lowest (or negative) profit margins were the best performers this quarter.

Going forward, we will continue to seek to provide diverse exposure to domestic small-cap stocks, including those within the smallest segments of the market, avoid stocks of companies with low-quality characteristics and maintain a disciplined process to manage active risk and transaction cost.

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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