NORTHERN EQUITY INDEX FUNDS

Transcription

1 NORTHERN EQUITY INDEX FUNDS ANNUAL REPORT MARCH 31, 2018

2 A MESSAGE FROM BOB BROWNE CHIEF INVESTMENT OFFICER Global equities deliveredrobust gains during the 12-month periodended March 31, 2018 (the Period ), notwithstanding a considerable pickup in volatilityduring Februaryand March. Investors were encouragedby the emergence of synchronized worldwide growth, with Europe,Japan and the emerging markets all joining the United States in an economic expansion. In addition, the passage of a long-awaited tax reduction package in the United States in December 2017 reduced the corporate tax rate to 21%. Together, these developments ledtobetterthan expected profit growth and steadily increasing earningsestimates for the U.S. In fact, the ratioofearningsestimateincreases comparedwith decreases from industry analysts recently reached levels not seen in nearly nine years. Despitethese positivefactors,the markets experiencedweaker performance, with significantly higher volatility during the last two months of the Period.The sell-off was sparked by the January jobs report,which indicated accelerating wagegains. This developmentfueledconcernsregarding the prospect of higher inflation, and with it the possibility of tighter monetary policy by the U.S. Federal Reserve. Computer-driven investment programs contributed to the volatility, as did concerns about possible tariffs on steel and aluminum imports. While these headlines appeared to be the key catalysts for the downturn,the main cause maybe that stocks were simply overdue for a slump.prior to the stock market selloff, the U.S. markethadexperienceda remarkable 80 weeks without a 5% correction,well above the normal frequency of 10-weekintervals. Together, these cross-cutting trends resulted in a gain of 13.99% for the S&P 500 Index over the Period.The developedinternational markets advanced 14.80%, as gauged by the MSCI EAFE Index, with aportion of the rally attributable to strength in foreign currencies versus the U.S. dollar. Emerging market stocks comfortably outperformedtheir developedmarket peers, as measured by the 24.93% return of the MSCI Emerging Markets Index. In the United States, the growth style outpacedvaluebyawidemargin duein largeparttoastrongbounce-back for technology stocks. Conversely,defensive and yield-orientedsectors suchas utilities, telecommunications services and consumerstaples laggedconsiderably. However, giventhat highereconomic growth and lower tax rates have resulted in improved earnings prospects for many stocks in the value category, the sizable outperformance for growth has led to a material gap in valuations between the two investment styles. In fact,the average price-to-earningsratio for valuestocks was lower at the end of March 2018 than it was at the beginning of 2017 despitethe positiveprice performanceinthe intervening period. Although the market disruptions of February and March of 2018 may have been unsettling to investors following such a long rally,we believe that the market s underlying fundamentals continue to exhibit strength. The outlook for global growth in 2018 remains constructive; and corporate performancehas been robust, with broad-based strength in revenues, bottom-line earnings and profit margins. Further, we expectthat U.S. growth could be bolstered by a combination of the new tax law and increased government spending. Potential risk factors include the emerging threat of atrade war and the possibility of slowing growth in China. Central bank policy also remains a wild card given the U.S. Federal Reserve s ongoing plan to boost interest rates. However, more important than the number of interest rate hikes willbethe economic climate in which they occur. We believe it will be much betterfor the U.S. Federal Reservetobe able toraise interest rates when investors are expecting it, versus the U.S. Federal Reserve having to raise rates because inflation is taking hold. We will be monitoring these issues closely as the year progresses in an effortto evaluate their possible impact on the global equitymarkets. Bob Browne Chief Investment Officer NorthernTrust

3 EQUITY INDEX FUNDS TABLE OF CONTENTS 2 PORTFOLIO MANAGEMENT COMMENTARY 10 STATEMENTS OF ASSETS AND LIABILITIES 12 STATEMENTS OF OPERATIONS 14 STATEMENTS OF CHANGES IN NET ASSETS 16 FINANCIAL HIGHLIGHTS 23 SCHEDULES OF INVESTMENTS 23 EMERGING MARKETS EQUITY INDEX FUND Ticker Symbol: NOEMX This report has been prepared for the general information of Northern Funds shareholders. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Northern Funds summary prospectus or prospectus, which contains more complete information about a fund s investment objectives, risks, fees and expenses. Investors are reminded to read a summary prospectus or prospectus carefully before investing or sending money. This report contains certain forward-looking statements about factors that may affect the performance of the funds in the future. These statements are based on Northern Funds management predictions and expectations concerning certain future events, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors. Management believes these forward-looking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in Northern Funds management strategies from those currently expected to be employed. 38 GLOBAL REAL ESTATE INDEX FUND Ticker Symbol: NGREX 49 GLOBAL SUSTAINABILITY INDEX FUND Ticker Symbol: NSRIX 62 INTERNATIONAL EQUITY INDEX FUND Ticker Symbol: NOINX 78 MID CAP INDEX FUND Ticker Symbol: NOMIX 85 SMALL CAP INDEX FUND Ticker Symbol: NSIDX 111 STOCK INDEX FUND Ticker Symbol: NOSIX 119 NOTES TO THE FINANCIAL STATEMENTS 134 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 135 TAX INFORMATION 136 FUND EXPENSES 138 TRUSTEES AND OFFICERS 142 INVESTMENT CONSIDERATIONS 144 FOR MORE INFORMATION Northern Funds are distributed by Northern Funds Distributors, LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101, not affiliated with Northern Trust. NOT FDIC INSURED May lose value / No bank guarantee NORTHERN FUNDS ANNUAL REPORT 1 EQUITY INDEX FUNDS

4 EQUITY INDEX FUNDS EMERGING MARKETS EQUITY INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Emerging Markets Equity Index Fund posted a return of 25.03% during the 12-month period ended March 31, 2018, compared with the Fund s benchmark, the MSCI Emerging Markets Index SM return of 24.93% for the same period. Emerging market equities outperformed U.S. stocks as measured by the S&P 500 Index, which returned 13.99% for the period. The top-performing sectors over the period were information technology and real estate, returning 39.90% and 37.64%, respectively. Telecommunication services and industrials were the bottom-performing sectors for the reporting period, with returns of 4.88% and 9.24%, respectively. From a regional perspective, Peru and Czech Republic were the top-performing countries with returns of 44.72% and 39.90%, respectively. Pakistan and Qatar were the bottom-performing countries, returning % and %, respectively. For the 12-month period ended March 31, 2018, emerging market equities registered the strongest returns when compared with domestic U.S. equities and developed international equities. Emerging markets rallied due to an upswing in global growth, and to be supported by developments in the United States. The U.S. dollar was weak throughout the period, and combined with increasing oil prices provided a tailwind for emerging markets generally. Oil prices increased steadily throughout the period, crossing $60 per barrel in late 2017, and ending the period just under $65. Brazil, Russia, India and China, the largest of the emerging market economies, all posted double-digit returns, with China and Brazil posting the highest returns of the four countries. Emerging markets could face some headwinds going forward in light of trade war rhetoric heating up between the United States and China, as investors become worried that global growth might be hindered. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/25/06 EMERGING MARKETS EQUITY INDEX FUND 25.03% 4.81% 2.39% 4.55% MSCI EMERGING MARKETS INDEX SM Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. The one year total return will differ from the total return in the Financial Highlights. The Financial Highlights total return has been adjusted to reflect performance in conformity with U.S. GAAP principles. Performance data current to the most recent month-end is available at northernfunds.com. STEVEN J. SANTICCIOLI With Northern Trust since 2003 GROWTH OF A $10,000 INVESTMENT $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 4/25/06 $17,011 $18,516 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. EMERGING MARKETS EQUITY INDEX FUND MSCI EMERGING MARKETS INDEX SM The MSCI Emerging Markets Index SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Information about Investment Considerations can be found on page 142. EQUITY INDEX FUNDS 2 NORTHERN FUNDS ANNUAL REPORT

5 EQUITY INDEX FUNDS GLOBAL REAL ESTATE INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Global Real Estate Index Fund returned 7.10% during the 12-month reporting period ended March 31, 2018, compared with the Fund s benchmark, the FTSE EPRA /NAREIT Global Index, which returned 6.55% for the period. Global real estate underperformed the broader global equity market, represented by the MSCI World Index, which returned 13.59%. The top-performing countries over the period were China and Spain, returning 77.27% and 55.45%, respectively. Turkey and the United Arab Emirates were the bottom-performing countries for the period, with returns of % and -9.37%, respectively. Global real estate markets experienced a strong 12 months ended March 31, 2018, but underperformed U.S. domestic and international equities. Spiking interest rates represented a significant drag on global real estate markets, and late in the period rhetoric from Washington D.C. regarding possible trade tariffs caused investors to worry that global growth might be hindered. Investors focused on strong synchronized global growth, low global interest rates and stable labor markets to propel global equity markets higher for much of the 12-month period. Late in the period, volatility in U.S. equity markets triggered increased volatility abroad. However, geopolitical events, including the aggressive posturing of North Korea, subsided late in the period as trade became the focal point for most nations. Oil prices increased steadily throughout the period, crossing $60 per barrel in late 2017, and ending the period just under $65 per barrel. The U.S. dollar weakened steadily throughout the period, which represented a tailwind for international equities returns in both the developed and emerging equity markets. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 07/26/06 GLOBAL REAL ESTATE INDEX FUND 7.10% 4.57% 3.37% 3.40% FTSE EPRA /NAREIT GLOBAL INDEX Fund Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northerntrust.com/funds. THOMAS O BRIEN With Northern Trust since 2004 GROWTH OF A $10,000 INVESTMENT $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 7/26/06 $14,779 $15,166 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. GLOBAL REAL ESTATE INDEX FUND FTSE EPRA /NAREIT GLOBAL INDEX The FTSE EPRA /NAREIT Global Index is a free float, market capitalization-weighted real estate index designed to represent publicly traded equity REITs and listed property companies globally. Expanded in December 2008, the FTSE EPRA /NAREIT Global Index covers both developed and emerging markets, and represents 38 countries worldwide. Information about Investment Considerations can be found on page 142. NORTHERN FUNDS ANNUAL REPORT 3 EQUITY INDEX FUNDS

6 EQUITY INDEX FUNDS GLOBAL SUSTAINABILITY INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Global Sustainability Index Fund returned 13.38% during the 12-month reporting period ended March 31, 2018, compared with the Fund s benchmark, the MSCI World ESG Leaders Index SM, which returned 13.11% for the period. ESG equities underperformed developed markets, represented by MSCI World Index, which returned 13.59% for the period. The top-performing sectors over the period were information technology and industrials, returning 31.00% and 15.58%, respectively. Utilities and energy were the bottom-performing sectors, with returns of 1.57% and 3.30%, respectively. The top-performing countries were Austria and Belgium, returning 51.21% and 43.91%, respectively. Australia and New Zealand were the bottom-performing countries, with returns of -3.76% and 2.82%, respectively. Global equity markets experienced a strong 12-month period, driven both by U.S. domestic and international regions. Investors focused on strong synchronized global growth, low global interest rates and stable labor markets to propel international equity markets higher for much of the 12-month period. Late in the period, volatility in U.S. equity markets triggered increased volatility abroad. Spiking interest rates and rhetoric from Washington D.C. regarding possible trade tariffs caused investors to pause, as they worried that global growth might be hindered. However, geopolitical events, including the aggressive posturing of North Korea, subsided late in the period as trade became the focal point for most nations. Oil prices increased steadily throughout the period, crossing $60 per barrel in late 2017, and ending the period just under $65 per barrel. The U.S. dollar weakened steadily throughout the period, which represented a tailwind for international equities returns in both the developed and emerging equity markets. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 03/05/08 GLOBAL SUSTAINABILITY INDEX FUND 13.38% 9.34% 5.73% 5.67% MSCI WORLD ESG LEADERS INDEX SM Fund Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northerntrust.com/funds. THOMAS O BRIEN With Northern Trust since 2004 GROWTH OF A $10,000 INVESTMENT $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 3/5/08 $17,430 $17,592 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. GLOBAL SUSTAINABILITY INDEX FUND MSCI WORLD ESG INDEX SM MSCI World ESG Leaders Index SM is a free float-adjusted, market capitalization-weighted index comprised of largeand mid-cap developed market companies in Asia Pacific, Europe and the Middle East, Canada and the United States. The Index holds a broad, diversified set of global companies, selected based on regional sector ranking of environmental, social and governance performance. It is not possible to invest directly in an index. Information about Investment Considerations can be found on page 142. EQUITY INDEX FUNDS 4 NORTHERN FUNDS ANNUAL REPORT

7 EQUITY INDEX FUNDS INTERNATIONAL EQUITY INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The International Equity Index Fund posted a total return of 15.06% during the 12-month period ended March 31, 2018, compared with the Fund s benchmark, the MSCI EAFE Index, which returned 14.80%. International equities outperformed U.S. equities as measured by the S&P 500 Index, which returned 13.99% for the same period. The top-performing sectors over the period were information technology and energy, returning 25.32% and 22.08%, respectively. Telecommunication services and health care were the bottom-performing sectors, with returns of 3.16% and 7.85%, respectively. From a regional perspective, Austria and Norway were the top-performing countries, with returns of 49.04% and 30.70%, respectively. China and Israel were the bottom-performing countries, returning % and -8.07%, respectively. Developed ex-u.s. equity markets demonstrated strong performance during the reporting period, besting U.S. equities. Investors focused on strong synchronized global growth, low global interest rates and stable labor markets to propel international equity markets higher for much of the 12-month period. Late in the period, volatility in U.S. equity markets triggered increased volatility abroad. Spiking interest rates and rhetoric from Washington D.C. regarding possible trade tariffs caused investors to pause, as they worried that global growth might be hindered. However, geopolitical events, including the aggressive posturing of North Korea, subsided late in the period as trade became the focal point for most nations. Oil prices increased steadily throughout the period, crossing $60 per barrel in late 2017, and ending the period just under $65 per barrel. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 03/22/05 INTERNATIONAL EQUITY INDEX FUND 15.06% 6.44% 2.60% 4.74% MSCI EAFE INDEX Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. The one year total return will differ from the total return in the Financial Highlights. The Financial Highlights total return has been adjusted to reflect performance in conformity with U.S. GAAP principles. Performance data current to the most recent month-end is available at northernfunds.com. STEVEN J. SANTICCIOLI With Northern Trust since 2003 GROWTH OF A $10,000 INVESTMENT $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 3/22/05 $18,286 $18,703 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. INTERNATIONAL EQUITY INDEX FUND MSCI EAFE INDEX The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. Information about Investment Considerations can be found on page 142. NORTHERN FUNDS ANNUAL REPORT 5 EQUITY INDEX FUNDS

8 EQUITY INDEX FUNDS MID CAP INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Mid Cap Index Fund posted a total return of 10.80% during the 12-month period ended March 31, 2018, compared with the Fund s benchmark, the S&P MidCap 400 Index, which returned 10.97%. Mid-cap equities underperformed large-cap equities as measured by the S&P 500 Index, which returned 13.99%. The top-performing sectors over the period were information technology and industrials, returning 21.46% and 16.37%, respectively. Telecommunication services and energy were the bottom-performing sectors for the period, with returns of % and %, respectively. U.S. equities demonstrated strong performance for the 12-month period, despite heightened volatility toward the end of the period. The most recent quarter saw U.S. equities post their first negative three-month period since the third quarter of The S&P 500 Index began the period on the tailwind of a strong rally in equities due to an unexpected victory by the Republican U.S. presidential candidate, which propelled markets higher through the next three quarters through December 31, The exuberance into late fourth quarter 2017 and into the first month of 2018 due to the passage of new U.S. tax legislation. The excitement pushed the Index to all-time highs in late January before volatility returned to the markets due to some surprising economic news, followed by trade war speculation. Market participants decided to take some gains off the table as surprisingly strong employment data for January propelled interest rates higher, and heightened rhetoric from Washington D.C. regarding possible trade tariffs threatened current projections for global growth. The U.S. Federal Reserve its effort to normalize short-term rates with a series of three rate hikes in June 2017, December 2017 and March 2018, bringing its target rate to 1.50%-1.75% at the end of the period. The confluence of events led to an increase in market skepticism and uncertainty surrounding future growth, signaling potential increased volatility for stocks going forward. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 03/22/05 MID CAP INDEX FUND 10.80% 11.80% 10.66% 9.68% S&P MIDCAP 400 INDEX Fund Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northerntrust.com/funds. BRENT REEDER With Northern Trust since 1993 GROWTH OF A $10,000 INVESTMENT $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 3/22/05 $33,312 $34,540 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. MID CAP INDEX FUND S&P MIDCAP 400 INDEX The S&P MidCap 400 Index is an unmanaged index consisting of 400 mid-cap stocks. The S&P MidCap 400 Index covers over 7% of the U.S. equities market. Information about Investment Considerations can be found on page 142. EQUITY INDEX FUNDS 6 NORTHERN FUNDS ANNUAL REPORT

9 EQUITY INDEX FUNDS SMALL CAP INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Small Cap Index Fund returned 11.68% during the 12-month period ended March 31, 2018, compared with the Fund s benchmark, the Russell 2000 Index, which returned 11.79% for the period. Small-cap equities underperformed large-cap equities, as measured by the Russell 1000 Index, which returned 13.98% during the period. The top-performing sectors over the period were health care and information technology, returning 25.05% and 17.03%, respectively. Energy and telecommunication services were the bottom-performing sectors, with returns of % and -7.94%, respectively. U.S. equities demonstrated strong performance for the 12-month period, despite heightened volatility toward the end of the period. The most recent quarter saw U.S. equities post their first negative three-month period since the third quarter of The S&P 500 Index began the period on the tailwind of a strong rally in equities due to an unexpected victory by the Republican U.S. presidential candidate, which propelled markets higher through the next three quarters through December 31, The exuberance into late fourth quarter 2017 and into the first month of 2018 due to the passage of new U.S. tax legislation. The excitement pushed the Index to all-time highs in late January 2018 before volatility returned to the markets due to some surprising economic news, followed by trade war speculation. Market participants decided to take some gains off the table as surprisingly strong employment data for January propelled interest rates higher, and heightened rhetoric from Washington D.C. regarding possible trade tariffs threatened current projections for global growth. The Federal Reserve its effort to normalize short-term rates with a series of three rate hikes in June 2017, December 2017 and March 2018, bringing its target rate to 1.50%-1.75% at the end of the period. The confluence of events led to an increase in market skepticism and uncertainty surrounding future growth, signaling potential increased volatility for stocks going forward. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 09/03/99 SMALL CAP INDEX FUND 11.68% 11.33% 9.64% 8.03% RUSSELL 2000 INDEX Fund Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northerntrust.com/funds. BRENT REEDER With Northern Trust since 1993 GROWTH OF A $10,000 INVESTMENT $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 9/3/99 $42,011 $45,770 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. SMALL CAP INDEX FUND RUSSELL 2000 INDEX The Russell 2000 Index is an unmanaged index which measures the performance of the 2,000 smallest of the 3,000 largest U.S. companies in the Russell 3000 Index based on market capitalization. Information about Investment Considerations can be found on page 142. NORTHERN FUNDS ANNUAL REPORT 7 EQUITY INDEX FUNDS

10 EQUITY INDEX FUNDS STOCK INDEX FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Stock Index Fund returned 13.87% during the 12-month reporting period ended March 31, 2018, compared with the Fund s benchmark, the S&P 500 Index, which returned 13.99% for the period. Large-cap equities outperformed small-cap equities, as measured by the Russell 2000 Index, which returned 5.13% for the reporting period. The top-performing sectors over the period were information technology and financials, returning 27.67% and 18.04%, respectively. Telecommunication services and consumer staples were the bottom-performing sectors for the reporting period, with returns of -4.91% and -1.17%, respectively. U.S. equities demonstrated strong performance for the 12-month period, despite heightened volatility toward the end of the period. The most recent quarter saw U.S. equities post their first negative three-month period since the third quarter of The S&P 500 Index began the period on the tailwind of a strong rally in equities due to an unexpected victory by the Republican presidential candidate, which propelled markets higher through the next three quarters through December 31, The exuberance into late fourth quarter 2017 and into the first month of 2018 due to the passage of new U.S. tax legislation. The excitement pushed the S&P 500 Index to all-time highs in late January 2018 before volatility returned to the markets due to some surprising economic news, followed by trade war speculation. Market participants decided to take some gains off the table as surprisingly strong employment data for January 2018 propelled interest rates higher, and heightened rhetoric from Washington D.C. regarding possible trade tariffs threatened current projections for global growth. The U.S. Federal Reserve its effort to normalize short-term rates with a series of three rate hikes in June 2017, December 2017 and March 2018, bringing its target rate to 1.50%-1.75% at the end of the period. The confluence of events led to an increase in market skepticism and uncertainty surrounding future growth, signaling potential increased volatility for stocks going forward. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2018 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 10/07/96 STOCK INDEX FUND 13.87% 13.19% 9.33% 8.02% S&P 500 INDEX Fund Performance reflects contractual expense reimbursements in effect. In their absence, performance would be reduced. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month-end is available at northerntrust.com/funds. BRENT REEDER With Northern Trust since 1993 GROWTH OF A $10,000 INVESTMENT $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 10/7/96 $52,444 $57,545 3/31/18 The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Unlike the Index, the Fund s total returns are reduced by operating expenses, such as transaction costs and management fees. A direct investment in an Index is not possible. STOCK INDEX FUND S&P 500 INDEX The S&P 500 Index is an unmanaged index consisting of 500 stocks and is a widely recognized common measure of the performance of the overall U.S. stock market. Information about Investment Considerations can be found on page 142. EQUITY INDEX FUNDS 8 NORTHERN FUNDS ANNUAL REPORT

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12 EQUITY INDEX FUNDS STATEMENTS OF ASSETS AND LIABILITIES Amounts in thousands, except per share data ASSETS: EMERGING MARKETS EQUITY INDEX FUND GLOBAL REAL ESTATE INDEX FUND Investments, at value $3,211,663 $1,856,478 Investments in affiliates, at value 28,939 5,980 Cash held at broker (restricted $2,122, $443 and $168, respectively) 3,416 1,005 Foreign currencies held at broker,atvalue (restricted $847,$242and $5,056, respectively) 1,482 (1) Foreign currencies, at value (cost$3,803, $8,667, $1,307and $21,012, respectively) 3,850 8,799 Interestincome receivable Dividend income receivable 8,683 7,425 Receivable forforeign taxreclaims Receivable forsecurities sold Receivable forvariation margin on futures contracts Receivable forfund shares sold 2,944 1,077 Receivable from investment adviser Unrealized appreciation on forwardforeign currency exchangecontracts Prepaid and otherassets 18 5 TotalAssets 3,259,957 1,883,040 LIABILITIES: Unrealized depreciation on forwardforeign currency exchangecontracts 3 94 Payable forsecurities purchased Payable forvariation margin on futures contracts 2 Payable forfund shares redeemed 884 1,082 Payable to affiliates: Management fees Custodyfees Shareholder servicing fees Transfer agent fees 10 5 Trusteefees 7 5 Deferredforeign capital gains taxpayable 2,616 Accrued otherliabilities TotalLiabilities 4,868 1,485 NetAssets $3,255,089 $1,881,555 ANALYSIS OF NET ASSETS: Capital stock $2,667,958 $1,609,551 Accumulated undistributed netinvestment income (loss) (8,576) (43,509) Accumulated undistributed netrealized gain (loss) (314,489) (83,422) Netunrealized appreciation 910, ,935 NetAssets $3,255,089 $1,881,555 Shares Outstanding ($.0001par value, unlimited authorization) 248, ,814 Net AssetValue, Redemption and Offering Price PerShare $13.10 $10.35 Investments, at cost $2,298,471 $1,457,496 Investments in affiliates, at cost 28,939 5,980 (1) Costs associated withforeign currencies held at broker are$1,478, $678 and $6,691, respectively. See Notes to thefinancial Statements. EQUITYINDEX FUNDS 10 NORTHERNFUNDS ANNUAL REPORT

13 MARCH 31,2018 GLOBAL SUSTAINABILITY INDEX FUND INTERNATIONAL EQUITY INDEX FUND MID CAP INDEX FUND SMALL CAP INDEX FUND STOCK INDEX FUND $387,957 $6,122,700 $2,287,119 $1,207,410 $7,743,987 8,320 28,338 33,084 9,163 37, (1) 6,692 (1) 1,337 21, ,172 2,292 1,234 7, , ,896 1, , ,186 6,221,542 2,324,046 1,218,606 7,794, , ,645 3,811 3,729 6, ,208 4,012 3,842 6,446 $399,903 $6,209,334 $2,320,034 $1,214,764 $7,787,749 $307,938 $5,413,727 $1,718,199 $798,318 $3,715,125 1,793 17,907 7,782 2,059 2,925 (2,781) (460,858) 28,467 5,525 40,141 92,953 1,238, , ,862 4,029,558 $399,903 $6,209,334 $2,320,034 $1,214,764 $7,787,749 28, , ,050 89, ,440 $13.84 $12.77 $19.17 $13.60 $31.35 $295,032 $4,884,008 $1,720,859 $798,338 $3,717,144 8,166 28,338 33,084 9,163 34,060 See Notestothe Financial Statements. NORTHERN FUNDS ANNUAL REPORT 11 EQUITYINDEXFUNDS

14 EQUITY INDEX FUNDS STATEMENTS OF OPERATIONS Amounts in thousands INVESTMENT INCOME: EMERGING MARKETS EQUITY INDEX FUND GLOBAL REAL ESTATE INDEX FUND Dividend income $63,891 (1) $67,465 (1) Non-cash dividend income 686 2,663 Dividend income from investments in affiliates Interestincome TotalInvestment Income 64,874 70,289 EXPENSES: Management fees 5,910 7,583 Custodyfees 2,569 1,742 Transfer agent fees Registration fees Printing fees Professional fees Shareholder servicing fees Trusteefees Interestexpense 12 Other TotalExpenses 9,642 10,002 Less expenses reimbursed by investment adviser (1,142) (478) NetExpenses 8,500 9,524 Net Investment Income 56,374 60,765 NET REALIZED AND UNREALIZED GAINS (LOSSES): Netrealized gains (losses) on: Investments (Note7) (12,498) 7,749 Futures contracts 9,339 2,019 Foreign currency transactions Forwardforeign currency exchangecontracts (245) 127 Netchanges in unrealized appreciation (depreciation) on: Investments 538,293 (2) 57,982 Investments in affiliates Futures contracts (1,305) (352) Foreign currency translations (248) 117 Forwardforeign currency exchangecontracts 175 (63) Net Gains 533,568 68,471 Net Increase in Net Assets Resulting from Operations $589,942 $129,236 (1) (2) Netof$8,099, $3,044, $423, and $13,174, respectively, in non-reclaimable foreign withholding taxes. Netofdeferredforeign capital gains taxof$2,616. See Notes to thefinancial Statements. EQUITYINDEX FUNDS 12 NORTHERNFUNDSANNUAL REPORT

15 FORTHE FISCAL YEAR ENDEDMARCH 31,2018 GLOBAL SUSTAINABILITY INDEX FUND INTERNATIONAL EQUITY INDEX FUND MID CAP INDEX FUND SMALL CAP INDEX FUND STOCK INDEX FUND $7,953 (1) $148,422 (1) $33,768 $14,146 $155, , , , ,151 34,096 14, , ,066 2,957 1,572 6, , , ,180 16,558 4,002 2,162 9,257 (118) (2,460) (542) (332) (1,120) 1,062 14,098 3,460 1,830 8,137 7, ,053 30,636 12, ,411 3,019 15, ,897 56, ,373 1,183 4,508 5,406 3,455 21, , ,972 29, ,157 69,492 62, , ,225 (165) (980) (991) (686) (1,020) 54 1,436 (41) (402) 33, , , , ,298 $40,973 $716,797 $234,440 $133,889 $1,044,709 See Notes to thefinancial Statements. NORTHERN FUNDS ANNUAL REPORT 13 EQUITYINDEXFUNDS

16 EQUITY INDEX FUNDS STATEMENTS OF CHANGES IN NET ASSETS EMERGING MARKETS EQUITY INDEX FUND GLOBAL REAL ESTATE INDEX FUND Amounts in thousands OPERATIONS: Net investment income $56,374 $36,852 $60,765 $48,243 Net realized gains (losses) (Note7) (3,347) (21,597) 10,787 (2,219) Net changeinunrealized appreciation 536, ,834 57,684 5,797 NetIncrease in Net Assets Resulting from Operations 589, , ,236 51,821 CAPITAL SHARE TRANSACTIONS: Net increase (decrease) in netassets resulting from capital share transactions 421, ,822 (75,556) (3,557) NetIncrease (Decrease) in NetAssets Resulting from Capital Share Transactions 421, ,822 (75,556) (3,557) DISTRIBUTIONS PAID: From netinvestment income (53,000) (36,000) (61,922) (69,189) From netrealized gains TotalDistributions Paid (53,000) (36,000) (61,922) (69,189) TotalIncrease (Decrease) in Net Assets 958, ,911 (8,242) (20,925) NET ASSETS: Beginning of year 2,296,815 1,552,904 1,889,797 1,910,722 End of year $3,255,089 $2,296,815 $1,881,555 $1,889,797 Accumulated Undistributed Net Investment Income (Loss) $(8,576) $(11,970) $(43,509) $(46,375) See Notestothe Financial Statements. EQUITYINDEXFUNDS 14 NORTHERN FUNDSANNUAL REPORT

17 FORTHE FISCAL YEARS ENDED MARCH 31, GLOBAL SUSTAINABILITY INDEX FUND INTERNATIONAL EQUITY INDEX FUND MID CAP INDEX FUND SMALL CAP INDEX FUND STOCK INDEX FUND $7,217 $5,863 $144,053 $124,720 $30,636 $25,657 $12,512 $12,137 $148,411 $142,606 4,536 4,629 25,533 (95,296) 135, ,385 59,822 46, , ,306 29,220 24, , ,907 68, ,619 61, , , ,195 40,973 34, , , , , , ,529 1,044,709 1,151,107 74,163 27,748 1,237,375 (186,469) 76, ,366 (24,995) 32,700 (541,344) (426,849) 74,163 27,748 1,237,375 (186,469) 76, ,366 (24,995) 32,700 (541,344) (426,849) (6,979) (5,800) (146,505) (127,449) (28,387) (26,000) (12,714) (11,700) (147,595) (140,493) (4,661) (3,044) (138,799) (98,783) (64,973) (32,856) (112,600) (51,017) (11,640) (8,844) (146,505) (127,449) (167,186) (124,783) (77,687) (44,556) (260,195) (191,510) 103,496 53,547 1,807, , , ,244 31, , , , , ,860 4,401,667 4,241,254 2,175,963 1,689,719 1,183, ,884 7,544,579 7,011,831 $399,903 $296,407 $6,209,334 $4,401,667 $2,320,034 $2,175,963 $1,214,764 $1,183,557 $7,787,749 $7,544,579 $1,793 $1,172 $17,907 $14,701 $7,782 $5,533 $2,059 $2,249 $2,925 $2,109 See Notestothe Financial Statements. NORTHERN FUNDS ANNUAL REPORT 15 EQUITYINDEXFUNDS

18 EQUITY INDEX FUNDS FINANCIAL HIGHLIGHTS EMERGING MARKETS EQUITY INDEX FUND Selected per share data Net AssetValue, Beginning of Year $10.68 $9.28 $10.86 $11.16 $11.58 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income Net realized and unrealized gains (losses) (1.58) (0.27) (0.44) TotalfromInvestment Operations (1.36) (0.01) (0.19) LESS DISTRIBUTIONS PAID: From netinvestment income (1) (0.22) (0.18) (0.22) (0.29) (0.23) TotalDistributions Paid (0.22) (0.18) (0.22) (0.29) (0.23) NetAssetValue, End of Year $13.10 $10.68 $9.28 $10.86 $11.16 TotalReturn (2) 24.84% 17.30% (12.38)% 0.00% (1.66)% SUPPLEMENTAL DATA AND RATIOS: Netassets, in thousands, end of year $3,255,089 $2,296,815 $1,552,904 $1,718,336 $1,936,530 Ratio toaverage netassets of: Expenses, netofreimbursements and credits (3) 0.30% 0.30% 0.30% 0.30% 0.30% Expenses, beforereimbursements and credits 0.34% 0.35% 0.35% 0.44% 0.72% Netinvestment income, netofreimbursements and credits (3) 2.00% 1.95% 2.36% 2.30% 2.25% Netinvestment income, beforereimbursements and credits 1.96% 1.90% 2.31% 2.16% 1.83% Portfolio Turnover Rate 27.03% 30.14% 34.20% 23.08% 32.31% (1) (2) (3) Distributions to shareholdersfromnet investment income include amounts relating to foreign currency transactions whichare treated as ordinaryincome forfederal income taxpurposes. Assumes investment at net assetvalue at thebeginning of theyear,reinvestment of all dividends and distributions, and acompleteredemption of theinvestment at net asset value at theend of theyear. The net expenses and net investment income ratios include additional reimbursements of management or advisoryfees, as applicable, incurredinconnection with theinvestment of uninvested cash in affiliated moneymarketfunds of approximately$34,000, $32,000, $15,000, $3,000 and $5,000, whichrepresent less than 0.01percent of average net assets forthe fiscal yearsended March 31,2018and 2017,respectivelyand less than percent of average net assets for thefiscal yearsended March 31,2016, 2015 and 2014,respectively. Absent theadditional reimbursements, netinvestment income and reimbursements would have been decreased and net expenses would have been increased by acorresponding amount. See Notes to thefinancial Statements. EQUITYINDEX FUNDS 16 NORTHERNFUNDS ANNUAL REPORT

19 FORTHE FISCAL YEARS ENDED MARCH 31, GLOBAL REAL ESTATE INDEX FUND Selected per share data Net AssetValue, Beginning of Year $9.99 $10.08 $10.41 $9.39 $9.70 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Netinvestment income Netrealized and unrealized gains (losses) (0.31) 0.96 (0.23) TotalfromInvestment Operations (0.04) 1.28 (0.01) LESS DISTRIBUTIONS PAID: From netinvestment income (1) (0.35) (0.36) (0.29) (0.26) (0.30) TotalDistributions Paid (0.35) (0.36) (0.29) (0.26) (0.30) NetAssetValue, End of Year $10.35 $9.99 $10.08 $10.41 $9.39 Total Return (2) 7.10% 2.81% (0.25)% 13.82% 0.03% SUPPLEMENTAL DATA AND RATIOS: Netassets, in thousands, end of year $1,881,555 $1,889,797 $1,910,722 $1,788,089 $1,388,286 Ratio to averagenet assets of: Expenses, netofreimbursements and credits (3) 0.50% 0.50% 0.50% 0.50% 0.50% Expenses, beforereimbursements and credits 0.53% 0.53% 0.53% 0.57% 0.73% Netinvestment income, netofreimbursements and credits (3) 3.21% 2.52% 2.59% 2.98% 2.32% Netinvestment income, beforereimbursements and credits 3.18% 2.49% 2.56% 2.91% 2.09% Portfolio Turnover Rate 9.53% 5.96% 8.55% 5.98% 9.14% (1) (2) (3) Distributions to shareholdersfromnet investment income include amounts relating to foreign currency transactions whichare treated as ordinaryincome forfederal income taxpurposes. Assumes investment at net assetvalue at thebeginning of theyear,reinvestment of all dividends and distributions, and acompleteredemption of theinvestment at net asset value at theend of theyear. The net expenses and net investment income ratios include additional reimbursements of management or advisoryfees, as applicable, incurredinconnection with theinvestment of uninvested cash in affiliated moneymarketfunds of approximately$16,000, $24,000, $28,000, $4,000 and $12,000, whichrepresent less than 0.01percent of average net assets forthe fiscal yearsended March 31,2018and 2017,respectively, and less than percent of average net assets for thefiscal yearsended March 31,2016, 2015 and 2014,respectively. Absent theadditional reimbursements, netinvestment income and reimbursements would have been decreased and net expenses would have been increased by acorresponding amount. See Notes to thefinancial Statements. NORTHERN FUNDS ANNUAL REPORT 17 EQUITYINDEX FUNDS

20 EQUITY INDEX FUNDS FINANCIAL HIGHLIGHTS GLOBAL SUSTAINABILITY INDEX FUND Selected per share data Net AssetValue, Beginning of Year $12.59 $11.47 $12.29 $11.87 $10.20 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income Net realized and unrealized gains (losses) (0.63) TotalfromInvestment Operations (0.39) LESS DISTRIBUTIONS PAID: From netinvestment income (1) (0.26) (0.27) (0.22) (0.27) (0.21) From netrealized gains (0.18) (0.14) (0.21) TotalDistributions Paid (0.44) (0.41) (0.43) (0.27) (0.21) NetAssetValue, End of Year $13.84 $12.59 $11.47 $12.29 $11.87 TotalReturn (2) 13.38% 13.55% (3.11)% 5.82% 18.38% SUPPLEMENTAL DATA AND RATIOS: Netassets, in thousands, end of year $399,903 $296,407 $242,860 $220,201 $177,675 Ratio to averagenet assets of: Expenses, netofreimbursements and credits (3) 0.30% 0.31% 0.31% 0.31% 0.30% Expenses, beforereimbursements and credits 0.34% 0.36% 0.37% 0.47% 0.83% Netinvestment income, netofreimbursements and credits (3) 2.08% 2.19% 2.13% 2.02% 2.70% Netinvestment income, beforereimbursements and credits 2.04% 2.14% 2.07% 1.86% 2.17% Portfolio Turnover Rate 5.64% 19.30% 16.97% 5.99% 12.32% (1) (2) (3) Distributions to shareholdersfromnet investment income include amounts relating to foreign currency transactions whichare treated as ordinaryincome forfederal income taxpurposes. Assumes investment at net assetvalue at thebeginning of theyear,reinvestment of all dividends and distributions, and acompleteredemption of theinvestment at net asset value at theend of theyear. The net expenses and net investment income ratios include additional reimbursements of management or advisoryfees, as applicable, incurredinconnection with theinvestment of uninvested cash in affiliated moneymarketfunds of approximately$10,000, $7,000, $4,000, $1,000 and $1,000, whichrepresent less than 0.01percent of average net assets forthe fiscal yearsended March 31,2018and 2017,respectively, and less than percent of average net assets forthe fiscal yearsended March 31,2016, 2015 and 2014,respectively. Absent theadditional reimbursements, netinvestment income and reimbursements would have been decreased and net expenses would have been increased by acorresponding amount. See Notes to thefinancial Statements. EQUITYINDEX FUNDS 18 NORTHERNFUNDS ANNUAL REPORT

21 FORTHE FISCAL YEARS ENDED MARCH 31, INTERNATIONAL EQUITY INDEX FUND Selected per share data Net AssetValue, Beginning of Year $11.39 $10.49 $11.78 $12.41 $10.78 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Netinvestment income Netrealized and unrealized gains (losses) (Note7) 1.40 (1) 0.91 (1.29) (0.57) 1.54 TotalfromInvestment Operations (1.00) (0.18) 1.87 LESS DISTRIBUTIONS PAID: From netinvestment income (2) (0.32) (0.34) (0.29) (0.45) (0.24) TotalDistributions Paid (0.32) (0.34) (0.29) (0.45) (0.24) NetAssetValue, End of Year $12.77 $11.39 $10.49 $11.78 $12.41 Total Return (3) 14.88% 12.07% (8.50)% (1.30)% 17.32% SUPPLEMENTAL DATA AND RATIOS: Netassets, in thousands, end of year $6,209,334 $4,401,667 $4,241,254 $4,244,015 $4,608,961 Ratio toaverage netassets of: Expenses, netofreimbursements and credits (4) 0.25% 0.25% 0.25% 0.26% 0.25% Expenses, beforereimbursements and credits 0.30% 0.30% 0.29% 0.39% 0.61% Netinvestment income, netofreimbursements and credits (4) 2.58% 2.98% 2.76% 2.91% 3.53% Netinvestment income, beforereimbursements and credits 2.53% 2.93% 2.72% 2.78% 3.17% Portfolio Turnover Rate 31.54% 28.03% 30.80% 48.57% 40.72% (1) (2) (3) (4) The Fund received reimbursements from NTI of approximately$137,000. The reimbursements represent less than $0.01per shareand had no effect on thefund s totalreturn. Distributions to shareholdersfromnet investment income include amounts relating to foreign currency transactions whichare treated as ordinaryincome forfederal income taxpurposes. Assumes investment at net assetvalue at thebeginning of theyear,reinvestment of all dividends and distributions, and acompleteredemption of theinvestment at net asset value at theend of theyear. The net expenses and net investment income ratios include additional reimbursements of management or advisoryfees, as applicable, incurredinconnection with theinvestment of uninvested cash in affiliated moneymarketfunds of approximately$55,000, $32,000, $19,000, $6,000 and $30,000 whichrepresent less than 0.01percent of average net assets forthe fiscal yearsended March 31,2018and 2017,respectively, and less than percent of average net assets for thefiscal yearsended March 31,2016, 2015 and 2014,respectively. Absent theadditional reimbursements, netinvestment income and reimbursements would have been decreased and net expenses would have been increased by acorresponding amount. See Notes to thefinancial Statements. NORTHERNFUNDS ANNUAL REPORT 19 EQUITYINDEX FUNDS