NORTHERN EQUITY FUNDS

Transcription

1 NORTHERN EQUITY FUNDS ANNUAL REPORT MARCH 31, 2017 MANAGED BY

2 A MESSAGE FROM BOB BROWNE CHIEF INVESTMENT OFFICER Global equities delivered strong, doubledigit gains during the 12-month period ended March 31, 2017 (the Period ), reflecting significant improvement in the prospects for economic growth. Early in 2016, the markets were under pressure from a variety of factors, foremost among them the sharp drop in commodity prices and concerns regarding a possible slowdown in China s economy. The fundamental backdrop improved considerably during the subsequent 12 months, however, a shift that translated to strong returns for the major equity indices. Several developments contributed to the increasingly positive outlook. First, global central banks brought the markets out of the doldrums early in the Period by announcing highly accommodative monetary policies. The resulting relief rally in stocks gained momentum through the spring and summer of 2016 as commodities recovered and evidence started to emerge that global growth was accelerating. Even the surprising result of the United Kingdom s vote to leave the European Union only interrupted the market recovery for a short time. The markets saved their largest gains for the months following the November 2016 U.S. election, when the Republican party sweep fueled expectations for a shift toward pro-growth policies such as lower taxes and reduced federal government regulations. The resulting rally ultimately stalled in early March, 2017 once it became apparent that the implementation of the Republican party s proposals would prove more difficult than anticipated, but the earlier strength propelled the major indices to robust, double-digit returns. The S&P 500 Index rose a solid 17.17% for the Period, but this return was exceeded by the even more impressive 26.22% gain for the small-cap Russell 2000 Index. Small companies, as a group, benefited from having greater exposure to domestic growth and lower vulnerability to the U.S. dollar relative to large caps. Developedmarket international equities, while posting a healthy increase of 11.67% (as measured by the MSCI EAFE Index) nonetheless trailed the U.S. market. The underperformance stemmed from both the slower growth of overseas economies relative to the United States, as well as the adverse impact of currency translation. The MSCI Emerging Markets Index outpaced developed markets with a return of 17.21%, fueled by a significant improvement in investor sentiment regarding the growth trajectory for countries in the asset class. Although much of the market s advance in late 2016 and early 2017 was characterized as a Trump Rally, we believe that it is worthwhile to look past the headlines to the market s underlying fundamentals. Distractions from the political realm have obscured the gradual strengthening in the earnings outlook for public companies across the globe. At the close of the Period, analysts were calling for the profits of companies in the MSCI World Index to increase 12% in 2017, led by the energy and financial sectors. Here at home, the U.S. economy has produced moderate growth with reasonable inflation and rising levels of business and consumer confidence. The anticipated boost from fiscal policy has not yet occurred, but this could still emerge as a tailwind for the economy in the months ahead. These developments prompted the U.S. Federal Reserve to raise interest rates several times during the course of the Period, but the increase has been gradual, datadependant and perhaps most important within the bounds of investor forecasts. While unexpected events always represent a potential source of disruption to market performance, we believe that these factors will continue to provide a solid foundation for stocks during the remainder of Bob Browne Chief Investment Officer Northern Trust

3 EQUITY 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 24 SCHEDULES OF INVESTMENTS 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 the Northern Funds 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 Northern 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 forwardlooking 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. 24 INCOME EQUITY FUND Ticker Symbol: NOIEX 27 INTERNATIONAL EQUITY FUND Ticker Symbol: NOIGX 32 LARGE CAP CORE FUND Ticker Symbol: NOLCX 36 LARGE CAP EQUITY FUND Ticker Symbol: NOGEX 38 LARGE CAP FUND Ticker Symbol: NOLVX 42 SMALL CAP CORE FUND Ticker Symbol: NSGRX 66 SMALL CAP FUND Ticker Symbol: NOSGX 75 TECHNOLOGY FUND Ticker Symbol: NTCHX 77 NOTES TO THE FINANCIAL STATEMENTS 88 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 89 TAX INFORMATION 90 FUND EXPENSES 92 TRUSTEES AND OFFICERS 96 INVESTMENT CONSIDERATIONS Northern Funds are distributed by Northern Funds Distributors, LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101, not affiliated with Northern Trust. 100 FOR MORE INFORMATION NOT FDIC INSURED May lose value / No bank guarantee NORTHERN FUNDS ANNUAL REPORT 1 EQUITY FUNDS

4 EQUITY FUNDS INCOME EQUITY FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY For the 12-month period ended March 31, 2017, U.S. equity markets rose sharply, with October 2016 the only month over the period with a negative total return. Following a period of declining earnings driven by lower commodity prices and a strong U.S. dollar, earnings growth returned accompanied by positive market sentiment. An improving economy supported rising inflation expectations and U.S. Treasury yields. Bond-substitute stocks such as real estate investment trusts, which outperformed earlier in 2016 as interest rates declined, lost ground as market rates rose. The Fund returned 12.94% for the 12-month period ended March 31, 2017, compared to 17.17% for the benchmark S&P 500 Index. The Fund s allocation to higher dividend yielding sectors such as telecommunication services, real estate, utilities and consumer staples detracted from relative performance, as these areas lagged the broader market. Conversely, non-dividend-paying stocks, which are not eligible for inclusion in the Fund, outperformed. The Fund s underweights in the information technology and energy sectors detracted from relative performance. Stock selection within the information technology, consumer staples and industrials sectors contributed to the Fund s relative performance. Stock selection detracted from relative return within the consumer discretionary, health care and financials sectors. Looking ahead, we will continue to focus on company selection with a consistent emphasis on identifying high quality dividend-paying companies. We will also seek to maintain our exposure to companies that exhibit prudent use of shareholder capital with an emphasis on total return. We believe that our focus on seeking income throughout the market through a diversified basket of stocks offers the potential to provide positive relative performance over the long term. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/01/94 INCOME EQUITY FUND 12.94% 10.43% 6.93% 8.65% 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. JACOB C. WEAVER With Northern Trust since 1998 GROWTH OF A $10,000 INVESTMENT $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 4/1/94 $67,430 $82,937 3/31/17 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. INCOME EQUITY 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 96. EQUITY FUNDS 2 NORTHERN FUNDS ANNUAL REPORT

5 EQUITY FUNDS INTERNATIONAL EQUITY FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The International Equity Fund returned 13.32% during the 12-month period ended March 31, 2017, outperforming the MSCI EAFE Index return of 11.67%. Global markets endured a number of geopolitical surprises over the past 12 months, including the Brexit vote and the U.S. presidential election results. Both events generated significant volatility in the equity markets, but did not prevent the global markets from registering double-digit gains. The U.S. Federal Reserve ( Fed ) increased its target rate by 25 basis points in December 2016 and March However, the long end of the curve was held down by the accommodative posture of other central banks. The European Central Bank and the Japanese Central Bank pushed their interest rates into negative territory, supporting the risk-on trade over the period. Accommodative central bank policies, stable inflation, strong manufacturing reports and modest oil prices have created a favorable environment for global economic growth. The 12 month period ended March 31, 2017 was nearly a mirror image of 2015, with the value factor providing strong leadership across the EAFE (Europe, Australia, Far East) regions. The value factor in Japan had become historically inexpensive by almost any measure early in 2016, and as with most pricing dislocations the mean reversion was rapid. The strong performance of the value factor supported the Fund s outperformance in all regions except the United Kingdom. Quality and momentum factors modestly detracted from performance, as low quality and low momentum securities outperformed. Despite large differences in returns among economic sectors, stock selection accounted for most of the Fund s outperformance, with sector allocation broadly neutral. Stock selection was positive across most sectors, with the strongest performance in health care, materials and energy. Stock selection within the consumer discretionary sector detracted slightly from overall performance. Our process considers and ranks companies based on three general criteria to inform investment decisions: valuation, sentiment and quality. By focusing on inexpensive, high-quality securities and prudent risk management, we believe that the Fund can deliver attractive long-term performance. We also believe that the Fund is positioned to benefit from market investors looking beyond broad economic data and refocusing on company fundamentals. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/01/94 INTERNATIONAL EQUITY FUND 13.32% 4.90% 1.27% 4.53% MSCI EAFE 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. MARK C. SODERGREN With Northern Trust since 2007 GROWTH OF A $10,000 INVESTMENT $40,000 $30,000 $20,000 $10,000 $0 4/1/94 $27,687 $29,834 3/31/17 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 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 96. NORTHERN FUNDS ANNUAL REPORT 3 EQUITY FUNDS

6 EQUITY FUNDS LARGE CAP CORE FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Fund returned 14.60% during the 12-month reporting period ended March 31, 2017, underperforming the 17.17% return of the S&P 500 Index. U.S. stocks ended March 2017, near its all-time highs, reflecting the strength of the U.S. economy and investor anticipation of pro-growth policies by the new administration. The U.S. economy to strengthen, with strong employment, low inflation, rising manufacturing indicators and a modest increase in Gross Domestic Product growth. The improving economic conditions provided an environment for the U.S. Federal Reserve ( Fed ) to begin increasing interest rates. The Fed boosted its target rate by a quarter point in December 2016 and March 2017, resulting in a strengthening of the dollar. Other global economies have not experienced the same economic strength as the United States, thus many central banks remained accommodative, and in the case of the European Central Bank and the Bank of Japan, experimented with negative interest rates. The combination of favorable central bank policies, low inflation, and stable oil prices helped to support a modest economic recovery in a number of global markets. In a reversal of 2016, market performance was led by the value and high-volatility factors early in 2017, while quality and momentum factors were mixed. Investor risk appetite generally improved, allowing value to gain momentum after an extended period of underperformance. Growth sectors such as health care and information technology strengthened after the U.S. election and led to the growth factor s strong performance in the first quarter of Defensive sectors including telecommunications services, utilities, and consumer staples underperformed the broader market in the 12 month reporting period. Consistent with investors risk-on posture, small-cap stocks outperformed large caps over the reporting period. Stock selection accounted for most of the Fund s outperformance, while sector allocation had a neutral effect. Our process considers and ranks companies based on three general criteria to inform investment decisions: valuation, sentiment and quality. Value and momentum were the best performing factors in the past 12 months, while quality underperformed. The Fund s underperformance was the result of unfavorable stock selection in the energy and consumer discretionary sectors, which offset stronger selection in financials and industrials. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 12/16/05 LARGE CAP CORE FUND 14.60% 12.75% 6.62% 7.20% 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. MARK C. SODERGREN With Northern Trust since 2007 GROWTH OF A $10,000 INVESTMENT $25,000 $20,000 $15,000 $10,000 $5,000 $0 12/16/05 $21,916 $23,693 3/31/17 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. LARGE CAP CORE 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 96. EQUITY FUNDS 4 NORTHERN FUNDS ANNUAL REPORT

7 EQUITY FUNDS LARGE CAP EQUITY FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The S&P 500 Index posted a strong gain of 17.17% in the 12-month period ended March 31, The market absorbed several unexpected political events, including the United Kingdom s vote to leave the European Union and the Republican sweep of the U.S. elections, and rose to all-time highs. The markets also displayed few ill effects from two Federal Reserve interest rate increases given that the moves were accompanied by supportive global growth and inflation expectations. In addition, investors anticipated that U.S. policy reform, deregulation and stimulus would provide a tailwind for earnings growth over the intermediate term. Financials benefited the most from the changing economic and policy landscape due to expected benefits from higher interest rates and a loosening of Dodd- Frank regulations. In general, cyclical sectors outperformed more conservative sectors with higher sensitivity to interest rates. In this environment, the telecommunication services, real estate, consumer staples and utilities sectors all lagged the broader market. The Large Cap Equity Fund posted a total return of 12.56% for the 12-month period ended March 31, 2017 and underperformed its benchmark, the S&P 500 Index. Stock selection in the health care, industrials, consumer discretionary and consumer staples sectors detracted from relative performance. Stock selection in real estate and materials contributed positively, as did underweights in the telecommunication services and utilities sectors. We continue to leverage our deep fundamental research to uncover opportunities created by market emotion. We maintain our search for defensible businesses that we believe have strong management teams, attractive valuations and exposure to favorable longer-term, cyclical and/or internal trends. INVESTMENT PERFORMANCE PORTFOLIO MANAGERS AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/01/94 LARGE CAP EQUITY FUND 12.56% 10.40% 6.31% 7.81% 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. GROWTH OF A $10,000 INVESTMENT $56,370 $82,937 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 4/1/94 LARGE CAP EQUITY FUND S&P 500 INDEX 3/31/17 THOMAS WOODEN With Northern Trust since 2014 CHRIS SHIPLEY With Northern Trust since 2000 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. 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 96. NORTHERN FUNDS ANNUAL REPORT 5 EQUITY FUNDS

8 EQUITY FUNDS LARGE CAP FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Russell 1000 Value Index delivered a gain of 19.22% in the 12-month period ended March 31, 2017, with positive returns in 11 of the individual months. Low interest rates and supportive economic and employment data were key drivers for returns in the first half of the reporting period. During the latter half of the reporting period, the favorable market outlook was bolstered by expectations that Republican control of Washington would lead to deregulation and fiscal relief, with an accompanying boost to corporate profitability. However, the optimism regarding potential policy outcomes diminished following a failed attempt by the Republicans to repeal and replace the Affordable Care Act. The value factor rallied in conjunction with rising investor sentiment during the middle six months of the reporting period, but stumbled later in the period as sentiment began to wane. The quality factor delivered mixed results, as investors focused on sector allocation rather than company fundamentals such as profitability and cash flow management. Investors rewarded cyclical sectors such as financials, information technology and materials over the defensive utilities, consumer staples, real estate and telecommunications services sectors. For the 12-month reporting period ended March 31, 2017, the Large Cap Value Fund posted a total return of 19.29%, compared with 19.22% for the Fund s benchmark, the Russell 1000 Value Index. The Fund s value model modestly outpaced the benchmark and contributed positively to performance. The strategy s focus on investing at the intersection of value and high quality led to strong stock selection within health care, consumer staples and real estate. A bias towards higher quality financials also aided results. Selection was weaker in consumer discretionary and energy, where lower quality stocks outperformed their higher quality peers. We expect headlines out of Washington to continue to represent a source of volatility for both market performance and investor sentiment. We believe that the Fund s objective to gain exposure to high quality companies trading at a discount relative to their peers is a prudent investment strategy in the current environment as well as in the longer term. INVESTMENT PERFORMANCE PORTFOLIO MANAGERS AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 08/03/00 LARGE CAP FUND 19.29% 11.33% 4.61% 6.24% RUSSELL 1000 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. SRIDHAR KANCHARLA With Northern Trust since 2007 MARK C. SODERGREN With Northern Trust since 2007 GROWTH OF A $10,000 INVESTMENT $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 8/3/00 $27,423 $30,881 3/31/17 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. LARGE CAP FUND RUSSELL 1000 INDEX The Russell 1000 Value Index is an unmanaged index measuring the performance of those companies included in the Russell 1000 Index having lower price-to-book ratios and forecasted growth values. Information about Investment Considerations can be found on page 96. EQUITY FUNDS 6 NORTHERN FUNDS ANNUAL REPORT

9 EQUITY FUNDS SMALL CAP CORE FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY Small-cap stocks had a strong showing in the 12-month period ended March 31, 2017, and outpaced large-cap stocks by a wide margin. Within the small-cap segment, value stocks outperformed growth. Risk aversion in the market appeared to ebb as optimism regarding improving economic conditions, fueled by expectations for regulatory and tax policy relief following the U.S. election, encouraged investors to rotate toward lower quality stocks. While the first quarter of 2017 saw some reassessment of the market s optimistic view regarding government policy, investor appetite for lower quality stocks remained robust. This trend created a challenging environment for the Small Cap Core Fund given its bias toward higher quality issues. The Fund returned 23.57% for the 12-month period ended March 31, 2017, underperforming the 26.22% return of its benchmark, the Russell 2000 Index for the same period. Stock selection detracted within a number of sectors, particularly in stronger performing areas such as information technology, materials and financials. In each of these sectors, the lower quality stocks where the Fund was underweight were particularly strong. On the other side of the ledger, the Fund benefited from stronger stock selection in the consumer discretionary and real estate sectors. Consistent with increased risk appetite, stocks with market caps below $700 million were among the best performers in the small-cap universe. This segment provided a positive contribution to performance given the Fund s long-term strategic holdings in micro caps. As designed, the Fund s overall valuation characteristics avoided tilting either to value or growth. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 09/30/99 SMALL CAP CORE FUND 23.57% 12.71% 7.71% 7.43% 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. ROBERT H. BERGSON With Northern Trust since 1997 GROWTH OF A $10,000 INVESTMENT $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 9/30/99 $35,068 $40,932 3/31/17 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 CORE 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 U.S. companies in the Russell 3000 Index, based on market capitalization. Information about Investment Considerations can be found on page 96. NORTHERN FUNDS ANNUAL REPORT 7 EQUITY FUNDS

10 EQUITY FUNDS SMALL CAP FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY Small-cap value stocks rallied during the 12-month period ended March 31, 2017, outperforming both the large-cap and small-cap growth categories. The strong performance of small-cap value was driven by some of the most deeply discounted sectors and securities in the asset class, as investors set aside concerns regarding economic growth and shifted into risk-on mode by the middle of The Small Cap Value Fund returned 23.82%, trailing the 29.37% return of its benchmark, the Russell 2000 Value Index for the reporting ended March 31, The Fund s underweight in lower-quality companies was the primary factor in its underperformance. During the 12-month reporting period ended March 31, 2017, companies with earnings, cash flows and profit margins that are low or negative generally outperformed the more profitable and reasonably valued peers that our strategy targets. In part, these results reflected the strong bounceback for some of the most deeply discounted stocks in the energy, materials and health care sectors. Lower quality stocks in these areas as defined by our proprietary stock selection models typically reacted strongly to the improvement in economic expectations that followed the November 2016 election. The more subdued market performance in the first quarter of 2017 contributed to a change in sector leadership, but the shift was not accompanied by a similar rally in higher quality stocks. Despite the effect on the Fund s short-term results, we continue to focus on selecting profitable, reasonably priced small company stocks in a costand risk-efficient manner. The Fund s sector allocation contributed positively to performance, highlighted by overweights in the outperforming materials and information technology sectors, together with an underweight in consumer discretionary stocks. However, the contribution was offset by the impact of stock selection. The Fund s investments in the materials sector failed to keep up with the gain of nearly 60% for the materials stocks in the Russell 2000 Value Index. Similarly, holdings within financials, technology and health care did not keep pace with the corresponding benchmark components. The lowest quality stocks were the best performers in each of these sectors, creating a strong headwind for the Fund. INVESTMENT PERFORMANCE PORTFOLIO MANAGER AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/01/94 SMALL CAP FUND 23.82% 12.79% 7.47% 10.34% 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. ROBERT H. BERGSON With Northern Trust since 1997 GROWTH OF A $10,000 INVESTMENT $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 4/1/94 $96,116 $97,065 3/31/17 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 FUND RUSSELL 2000 INDEX The Russell 2000 Value Index is an unmanaged index measuring the performance of those companies included in the Russell 2000 Index having lower price-to-book ratios and lower forecasted growth values. Information about Investment Considerations can be found on page 96. EQUITY FUNDS 8 NORTHERN FUNDS ANNUAL REPORT

11 EQUITY FUNDS TECHNOLOGY FUND (UNAUDITED) PORTFOLIO MANAGEMENT COMMENTARY The Technology Fund returned 22.04% in the 12-month period ended March 31, 2017, outperforming the 17.17% return of the S&P 500 Index. Fund positions in both information technology and health care outpaced the corresponding benchmark components, aiding performance. We believe that the Fund s relative strength is a reflection of our fundamental approach and emphasis on companies whose growth and innovation can drive above-average profits over time. The Fund s top performing technology stocks included Applied Materials, Inc., Activision Blizzard, Inc. and Proofpoint, Inc, while its bottom performers were Cognizant Technology Solutions Corp., Imperva, Inc. and Qualcomm, Inc. Key contributors in health care included HMS Holdings Corp., Spectranetics Corp. and Wright Medical Group NV. Community Health Systems, Inc., Alexion Pharmaceuticals, Inc. and Express Scripts Holding Co. were among the leading detractors. We increased the Fund s weighting in the health care sector in an opportunistic fashion during the course of the period, taking advantage of market pullbacks related to the U.S. election and policy concerns. We continue to focus our research efforts on using volatility to purchase shares of market leaders with above-average growth prospects when they reach compelling valuations. This approach led us to hold above-average weightings in the software, Internet and semiconductor industries, all of which feature strong longer-term growth trends and attractive fundamentals. We also see opportunities stemming from improving business confidence and emerging digital technologies such as the Internet of Things, 5G mobile networking, machine learning and artificial intelligence, all of which could potentially drive higher levels of spending on technology infrastructure. Health care stocks experienced elevated volatility during the election cycle, a trend that after the U.S. election. Recent uncertainties regarding the Trump administration have started to hold sway as Republican efforts to repeal the Affordable Care Act failed in Congress. Our long-term view regarding the health care sector remains favorable, largely due to innovations by biopharmaceutical and medical-device companies. In particular, we have sought opportunities among companies with robust new-product pipelines. We continue to see the convergence of health care and technology as a key driver of long-term stock performance. INVESTMENT PERFORMANCE PORTFOLIO MANAGERS AVERAGE ANNUAL RETURNS for periods ended March 31, 2017 TOTAL RETURN ONE YEAR FIVE YEAR TEN YEAR SINCE INCEPTION 04/01/96 TECHNOLOGY FUND 22.04% 9.59% 8.13% 8.74% 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. DEBORAH L. KOCH With Northern Trust since 2003 SANDEEP SOORYA With Northern Trust since 2011 GROWTH OF A $10,000 INVESTMENT $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 4/1/96 $58,065 $54,365 3/31/17 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. TECHNOLOGY 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 96. NORTHERN FUNDS ANNUAL REPORT 9 EQUITY FUNDS

12 EQUITY FUNDS STATEMENTS OF ASSETS AND LIABILITIES Amounts in thousands, except per share data INCOME EQUITY FUND INTERNATIONAL EQUITY FUND LARGE CAP CORE FUND LARGE CAP EQUITY FUND ASSETS: Investments, at value $227,664 $151,870 $126,427 $119,168 Investments in affiliates, at value 2, , Cash held at broker 190 Foreign currencies held at broker, at value (restricted $8) 8 (1) Foreign currencies, at value (cost $1,251) 1,248 Dividend income receivable Receivable for foreign tax reclaimable 493 Receivable for securities sold Receivable for variation margin on futures contracts Receivable for fund shares sold Receivable from investment adviser Prepaid and other assets Total Assets 230, , , ,951 LIABILITIES: Payable for securities purchased Payable for variation margin on futures contracts Payable for fund shares redeemed Payable to affiliates: Management fees Custody fees Shareholder servicing fees Transfer agent fees 1 Trustee fees Accrued other liabilities Total Liabilities Net Assets $230,511 $154,784 $127,255 $119,762 ANALYSIS OF NET ASSETS: Capital stock $184,923 $272,378 $119,859 $83,863 Accumulated undistributed net investment income (loss) (3) Accumulated undistributed net realized gain (loss) 619 (131,214) (7,235) 1,222 Net unrealized appreciation 44,939 12,961 14,608 34,680 Net Assets $230,511 $154,784 $127,255 $119,762 Shares Outstanding ($.0001 par value, unlimited authorization) 17,213 17,083 7,493 5,633 Net Asset Value, Redemption and Offering Price Per Share $13.39 $9.06 $16.98 $21.26 Investments, at cost $182,719 $138,879 $111,821 $84,488 Investments in affiliates, at cost 2, , (1) Cost associated with foreign currencies held at broker is $8. EQUITY FUNDS 10 NORTHERN FUNDS ANNUAL REPORT

13 MARCH 31, 2017 LARGE CAP FUND SMALL CAP CORE FUND SMALL CAP FUND TECHNOLOGY FUND $92,832 $487,087 $3,577,666 $75,728 1,135 3, , , , , , ,897 3,826,523 77,323 44, , , , $93,854 $490,643 $3,777,051 $76,464 $148,135 $351,674 $2,477,066 $56, ,635 (110) (61,172) 3,603 68,937 2,045 6, ,995 1,229,413 17,803 $93,854 $490,643 $3,777,051 $76,464 6,168 20, ,371 3,350 $15.22 $24.01 $24.00 $22.83 $86,546 $352,147 $2,350,706 $57,925 1,135 3, , NORTHERN FUNDS ANNUAL REPORT 11 EQUITY FUNDS

14 EQUITY FUNDS STATEMENTS OF OPERATIONS Amounts in thousands INCOME EQUITY FUND INTERNATIONAL EQUITY FUND LARGE CAP CORE FUND LARGE CAP EQUITY FUND INVESTMENT INCOME: Dividend income $7,210 $3,964 (1) $3,162 $1,977 Dividend income from investments in affiliates Interest income 1 1 Total Investment Income 7,218 3,967 3,165 1,979 EXPENSES: Management fees 2,223 1, ,008 Custody fees Transfer agent fees Registration fees Printing fees Professional fees Shareholder servicing fees Trustee fees Other Total Expenses 2,682 1, ,216 Less expenses reimbursed by investment adviser (329) (454) (184) (171) Net Expenses 2,353 1, ,045 Net Investment Income (Loss) 4,865 2,544 2, NET REALIZED AND UNREALIZED GAINS (LOSSES): Net realized gains (losses) on: Investments 8,520 14,233 3,985 8,568 Futures contracts (326) 232 Foreign currency transactions (347) Net change in unrealized appreciation (depreciation) on: Investments 14,886 2,820 11,666 4,937 Futures contracts (59) Foreign currency translations (8) Net Gains 23,232 16,706 15,824 13,505 NetIncreaseinNetAssetsResultingfromOperations $28,097 $19,250 $18,324 $14,439 (1) Net of $342 in non-reclaimable foreign withholding taxes. EQUITY FUNDS 12 NORTHERN FUNDS ANNUAL REPORT

15 FOR THE FISCAL YEAR ENDED MARCH 31, 2017 LARGE CAP FUND SMALL CAP CORE FUND SMALL CAP FUND TECHNOLOGY FUND $2,235 $5,988 $61,721 $ ,238 6,021 62, ,320 31, , ,034 3,953 40,060 1,026 (454) (960) (7,145) (91) 580 2,993 32, ,658 3,028 29,229 (447) 8,561 2,792 80,580 4, ,743 36,013 6,043 89, ,090 10,839 (30) (221) (2,189) 14,806 94, ,494 15,150 $16,464 $97,672 $696,723 $14,703 NORTHERN FUNDS ANNUAL REPORT 13 EQUITY FUNDS

16 EQUITY FUNDS STATEMENTS OF CHANGES IN NET ASSETS INCOME EQUITY FUND INTERNATIONAL EQUITY FUND LARGE CAP CORE FUND LARGE CAP EQUITY FUND Amounts in thousands OPERATIONS: Net investment income (loss) $4,865 $5,628 $2,544 $3,101 $2,500 $2,775 $934 $1,133 Net realized gains (losses) 8,194 (3,973) 13,886 5,093 4,217 1,301 8,568 11,844 Net change in unrealized appreciation (depreciation) 15,038 (103) 2,820 (31,288) 11,607 (4,714) 4,937 (16,725) Net Increase (Decrease) in Net Assets Resulting from Operations 28,097 1,552 19,250 (23,094) 18,324 (638) 14,439 (3,748) CAPITAL SHARE TRANSACTIONS: Net increase (decrease) in net assets resulting from capital share transactions (30,088) (79,520) (15,177) (32,040) (32,774) (22,064) (6,746) (13,341) Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (30,088) (79,520) (15,177) (32,040) (32,774) (22,064) (6,746) (13,341) DISTRIBUTIONS PAID: From net investment income (4,902) (5,770) (2,400) (3,400) (2,521) (2,783) (968) (1,107) From net realized gains (2,136) (8,579) (11,347) (2,879) Total Distributions Paid (7,038) (14,349) (2,400) (3,400) (2,521) (2,783) (12,315) (3,986) Total Increase (Decrease) in Net Assets (9,029) (92,317) 1,673 (58,534) (16,971) (25,485) (4,622) (21,075) NET ASSETS: Beginning of year 239, , , , , , , ,459 End of year $230,511 $239,540 $154,784 $153,111 $127,255 $144,226 $119,762 $124,384 Accumulated Undistributed Net Investment Income (Loss) $30 $67 $659 $861 $23 $44 $(3) $31 EQUITY FUNDS 14 NORTHERN FUNDS ANNUAL REPORT

17 FOR THE FISCAL YEARS ENDED MARCH 31, LARGE CAP FUND SMALL CAP CORE FUND SMALL CAP FUND TECHNOLOGY FUND $1,658 $1,540 $3,028 $1,810 $29,229 $32,739 $(447) $(414) 8,793 1,142 5,535 6, ,593 43,518 4,311 7,834 6,013 (8,925) 89,109 (39,255) 550,901 (202,939) 10,839 (12,757) 16,464 (6,243) 97,672 (31,116) 696,723 (126,682) 14,703 (5,337) (10,258) (7,709) 82,463 75, , ,623 (7,339) 2,814 (10,258) (7,709) 82,463 75, , ,623 (7,339) 2,814 (1,400) (1,545) (3,000) (1,903) (32,800) (31,457) (475) (8,668) (48,664) (88,890) (3,045) (9,472) (1,400) (1,545) (3,475) (10,571) (81,464) (120,347) (3,045) (9,472) 4,806 (15,497) 176,660 34, ,740 (93,406) 4,319 (11,995) 89, , , ,689 2,914,311 3,007,717 72,145 84,140 $93,854 $89,048 $490,643 $313,983 $3,777,051 $2,914,311 $76,464 $72,145 $605 $347 $371 $340 $1,635 $6,031 $(110) $(157) NORTHERN FUNDS ANNUAL REPORT 15 EQUITY FUNDS

18 EQUITY FUNDS FINANCIAL HIGHLIGHTS INCOME EQUITY FUND Selected per share data Net Asset Value, Beginning of Year $12.22 $12.74 $15.82 $14.52 $12.99 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income Net realized and unrealized gains (losses) 1.29 (0.09) Total from Investment Operations LESS DISTRIBUTIONS PAID: From net investment income (0.27) (0.27) (0.56) (0.24) (0.26) From net realized gains (0.12) (0.43) (3.91) (0.56) Total Distributions Paid (0.39) (0.70) (4.47) (0.80) (0.26) Net Asset Value, End of Year $13.39 $12.22 $12.74 $15.82 $14.52 Total Return (1) 12.94% 1.62% 9.40% 14.72% 14.04% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year $230,511 $239,540 $331,857 $390,616 $360,423 Ratio to average net assets of: Expenses, net of reimbursements and credits (2) 1.01% 1.00% 1.00% 1.00% 1.00% Expenses, before reimbursements and credits 1.15% 1.13% 1.16% 1.25% 1.23% Net investment income, net of reimbursements and credits (2) 2.07% 2.12% 2.22% 1.96% 1.85% Net investment income, before reimbursements and credits 1.93% 1.99% 2.06% 1.71% 1.62% Portfolio Turnover Rate 32.17% 13.14% % 14.34% 11.27% (1) (2) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. The net expenses and net investment ratios include additional reimbursements of management or advisory fees, as applicable, incurred in connection with the investment cash in affiliated money market funds of approximately $5,000, which represents less than 0.01 percent of average net assets for the fiscal year ended March 31, 2017, approximately $3,000, $2,000 and $7,000, which represent less than percent of average net assets for the fiscal years ended March 31, 2016, 2015 and 2014, respectively, and approximately $9,000, which represents 0.01 percent of average net assets for the fiscal year ended March 31, Absent the additional reimbursement, net investment income and reimbursements would have been decreased and net expenses would have been increased by a corresponding amount. EQUITY FUNDS 16 NORTHERN FUNDS ANNUAL REPORT

19 FOR THE FISCAL YEARS ENDED MARCH 31, INTERNATIONAL EQUITY FUND Selected per share data Net Asset Value, Beginning of Year $8.12 $9.39 $10.05 $8.53 $7.95 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income Net realized and unrealized gains (losses) 0.93 (1.27) (0.51) Total from Investment Operations 1.07 (1.10) (0.31) LESS DISTRIBUTIONS PAID: From net investment income (1) (0.13) (0.17) (0.35) (0.15) (0.14) From net realized gains (0.03) Total Distributions Paid (0.13) (0.17) (0.35) (0.18) (0.14) Net Asset Value, End of Year $9.06 $8.12 $9.39 $10.05 $8.53 Total Return (2) 13.32% (11.78)% (2.91)% 19.96% 9.09% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year $154,784 $153,111 $211,645 $253,233 $259,920 Ratio to average net assets of: Expenses, net of reimbursements and credits (3) 0.93% (4) 1.08% 1.09% 1.06% 1.06% Expenses, before reimbursements and credits 1.23% 1.22% 1.26% 1.32% 1.37% Net investment income, net of reimbursements and credits (3) 1.67% (4) 1.66% 2.02% 3.00% 1.88% Net investment income, before reimbursements and credits 1.37% 1.52% 1.85% 2.74% 1.57% Portfolio Turnover Rate % 12.78% 13.02% 16.09% 27.40% (1) (2) (3) (4) Distributions to shareholders from net investment income include amounts relating to foreign currency transactions which are treated as ordinary income for federal income tax purposes. Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. The net expenses and net investment income ratios include additional reimbursements of management or advisory fees, as applicable, incurred in connection with the investment of uninvested cash in affiliated money market funds of approximately $1,000, which represents less than 0.01 percent and percentof average net assets for each of the fiscal years ended March 31, 2017 and 2016, respectively, and less than $1,000, which represents less than percent of average net assets for the fiscal year ended March 31, 2015, and approximately $3,000, which represents less than percent of average net assets for each of the fiscal years ended March 31, 2014 and 2013, respectively. Absent the additional reimbursements, net investment income and reimbursementswould have been decreased and net expenses would have been increased by a corresponding amount. Effective January 1, 2017, the investment adviser agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund s total expenses (other than certain excepted expenses noted in the Notes to the Financial Statements) to 0.50%. Prior to January 1, 2017, the expense limitation had been 1.06%. NORTHERN FUNDS ANNUAL REPORT 17 EQUITY FUNDS

20 EQUITY FUNDS FINANCIAL HIGHLIGHTS LARGE CAP CORE FUND Selected per share data Net Asset Value, Beginning of Year $15.10 $15.42 $14.11 $11.43 $10.17 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income Net realized and unrealized gains (losses) 1.88 (0.32) Total from Investment Operations 2.18 (0.04) LESS DISTRIBUTIONS PAID: From net investment income (0.30) (0.28) (0.20) (0.20) (0.22) Total Distributions Paid (0.30) (0.28) (0.20) (0.20) (0.22) Net Asset Value, End of Year $16.98 $15.10 $15.42 $14.11 $11.43 Total Return (1) 14.60% (0.22)% 10.81% 25.31% 14.76% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year $127,255 $144,226 $169,711 $25,553 $12,564 Ratio to average net assets of: Expenses, net of reimbursements and credits (2) 0.49% (3) 0.59% 0.62% 0.62% 0.62% Expenses, before reimbursements and credits 0.63% 0.59% 0.83% 1.47% 1.98% Net investment income, net of reimbursements and credits (2) 1.85% (3) 1.82% 1.57% 1.69% 2.05% Net investment income, before reimbursements and credits 1.71% 1.82% 1.36% 0.84% 0.69% Portfolio Turnover Rate 66.77% 56.10% 41.81% 95.11% 85.90% (1) (2) (3) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. The net expenses and net investment ratios include additional reimbursements of management or advisory fees, as applicable fees, incurred in connection with the investment cash in affiliated money market funds of approximately $1,000, which represents less than 0.01 percent of average net assets for the fiscal year ended March 31, 2017, approximately $1,000, which represents less than percent of average net assets for the fiscal year ended March 31, 2016, and less than $1,000, which represents less than percent of average net assets for each of the fiscal years ended March 31, 2015, 2014 and 2013, respectively. Absent the additional reimbursement, net investment income and reimbursements would have been decreased and net expenses would have been increased by a corresponding amount. Effective June 15, 2016, the investment adviser agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund s total expenses (other than certain excepted expenses noted in the Notes to the Financial Statements) to 0.45%. Prior to June 15, 2016, the expense limitation had been 0.60%. EQUITY FUNDS 18 NORTHERN FUNDS ANNUAL REPORT