NORTHERN FUNDS Active M International Equity Fund (NMIEX) (Formerly known as Multi-Manager International Equity Fund) 4Q 2017 Performance Review December 31, 2017 Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.
Fund Facts Fund Objective: Capital Appreciation Inception Date: June 22, 2006 Ticker Symbol: NMIEX Benchmark: MSCI World ex USA IMI Index Sub-Adviser Target Allocations* Brandes Investment Partners, LP 10% WCM Investment Management 30% Strategy Objectives Under normal circumstances, invest at least 80% of net assets in equity securities of issuers domiciled outside the U.S. Leverage a disciplined and consistent research process to identify sub-advisers where manager selection and allocations are determined using a multi-factor based screening and optimization approach augmented with deep qualitative and fundamental due diligence. Add value through the combination of sub-advisers who are specialists in their respective styles. This approach should isolate the stock selection skills of the sub-advisers as the primary source of value added for the Fund over time. Continuously monitor the style and characteristics of the Fund and actively manage to the target allocations of the subadvisers. Wellington Management Company LLP 30% *Actual allocations may vary. Causeway Capital Management, LLC 20% Victory/Trivalent 10% By properly combining sub-advisers, we attempt to deliver robust alpha and broad diversification, while maintaining factor neutral biases (such as size, value and momentum) across international equity markets. Portfolio Characteristics Well diversified portfolio, benchmarked to the MSCI World ex- USA IMI Index. The Fund currently uses four sub-advisers with various investment approaches. Designed to maintain factor neutral biases across international equity markets. 2 See page 12 for important disclosure information
GLOSSARY Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes. International Risk: International investing involves increased risk and volatility. Emerging Markets Risk: Emerging market investing is subject to additional economic, political, liquidity and currency risks not associated with more developed countries. Multi-Manager Risk: a risk that the sub-advisers' investment styles will not always be complementary, which could affect the performance of the Fund. Weighted Average Market Capitalization: a firm s closing stock price multiplied by the number of shares. % EPS Growth past 5 years: a 5 year annualized earnings growth rate. Earnings per share is a part of a company's profit which is allocated to an individual outstanding share of common stock. As viewed by the investor, it is the rate of earnings which are returned on the original investment made. Also known as EPS for short, the earnings per share can be used to indicate a corporation's financial profitability. Positive Trailing P/E: the ratio of a firm s closing stock price and its trailing 12 months earnings per share, excluding those companies with negative earnings. A P/E ratio is generally used to provide investors with a better understanding of a company s value. Price to Book: a ratio used to compare a stock s market value to its book value. It is calculated by dividing the current price of the stock by the latest quarter s book value per share. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. MSCI ACWI Ex-USA Index: is a free float-adjusted market capitalization-weighted index that is designed to measure the equity performance in the global developed and emerging markets, excluding the U.S. It is not possible to invest directly in an index. MSCI World ex USA IM Index: is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. It captures large, mid and small cap representation across 22 developed markets, excluding the United States, and covers approximately 99% of the free float-adjusted market capitalization in each country. It is not possible to invest directly in an Index. Please refer to the Fund s prospectus for further information relating to principal risks. 3 See page 12 for important disclosure information
Fund Performance & Quarterly Fund Commentary 4Q Ι 2017 QUARTERLY COMMENTARY International equity markets, as measured by the MSCI World ex US IM Index, returned 4.46% over the fourth quarter as growth outperformed value and smaller capitalization companies bested larger capitalization companies within the developed markets. Within the Index, returns were led by companies in Japan and the U.K. While returns were positive across sectors, notwithstanding utilities, the market was led by health care, technology and energy companies. The Active M International Equity Fund generated 28 basis points (0.28%) of excess performance over the MSCI World ex-us IM Index over the fourth quarter, returning 4.74% compared to the Index return of 4.46%. Issue selection, across geographies and across sectors, was the largest contributor to quarterly performance. On a sector basis, the healthcare and energy sectors were among the leading contributors to relative performance. Geographically, issue selection among Continental European companies added value. An approximate 13.9% off-benchmark allocation to the emerging markets further aided period returns. Over the 2017 calendar year, the Fund returned 29.05%, 388 basis points (3.88%) ahead of the Index, net of fees. International small cap equity sub-adviser, Victory Capital Management, delivered strong returns over the quarter through positive issue selection. Particular skill was demonstrated among industrials, consumer discretionary, financials and energy companies. International value manager, Causeway Capital Management, enhanced quarterly Fund performance as it added value through positive issue selection. During the quarter two new sub-advisers were added to the Fund, Wellington Management and Brandes Investment Partners. In turn, Cambiar Investors exited the Fund. PERFORMANCE (in %) as of December 31, 2017 Quarter YTD 1 Year 3 Years 5 Years 10 Years Inception to Date 2017 2016 2015 2014 Active M International Equity Fund - Inception 6/22/06 4.74 29.05 29.05 6.56 5.70 1.27 3.26 29.05-1.16-5.14-5.81 MSCI World ex USA IMI Index (net)* 4.46 25.17 25.17 8.11 7.97 2.28 4.12 25.17 2.95-1.95-4.45 Excess Return 0.27 3.88 3.88-1.55-2.27-1.01-0.85 3.88-4.11-3.19-1.35 Annual Expense Ratio: Gross, 0.95%; Net,0.85% 1 MSCI ACWI ex USA ND (net)* 4.23 25.03 25.03 7.80 7.90 1.84 4.11 25.03-4.90 22.78 17.32 *The net index provides the equity returns including dividends net of withholding tax rates ; ** Effective on June 16, 2016, the benchmark for the Active M International Equity Fund has changed from the MSCI ACWI ex USA to the MSCI World ex USA IMI Index. The new benchmark captures large, mid and small cap representation across the developed markets and is better aligned to the new Active M International Equity Fund. Returns quoted represent past performance, which 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. Call 800-595-9111 for returns current to the most recent month-end. Returns for periods greater than one year are annualized. Net expense ratio reflects voluntary expense reimbursements by the Fund s investment advisors that may be changed or terminated at any time. See the Appendix for additional disclosure about performance. 1 The Gross and Net Expense Ratios are as of the most recent prospectus. The Net Expense Ratio includes contractual expense reimbursements that, if not extended, will end of July 31, 2018. 4 See page 12 for important disclosure information
Fund Characteristics 4Q Ι 2017 Fund Facts Fund Objective: Capital Appreciation Inception Date: June 22, 2006 Ticker Symbol: NMIEX Benchmark: MSCI World ex USA IMI Index 5 LARGEST HOLDINGS Company FUND CHARACTERISTICS % of Fund Csl 1.4% Keyence Corp 1.3% Accenture Plc Ireland 1.2% Bp 1.2% Chubb Limited 1.2% Total* 6.3% NMIEX *The Total column may not sum exactly due to rounding. **Currency positions are excluded. Portfolio composition may change at any time. Source: Wilshire Atlas 5 See page 12 for important disclosure information Benchmark Wtd Avg Market Cap $47.2 Billion $50.2 Billion % EPS Growth - Past 5 yrs. 7.74% 9.08% Positive Trailing P/E 20.58x 18.81x Price to Book 1.55 1.79 Number of Holdings** 444 3549 REGIONAL/COUNTRY WEIGHTS NMIEX Benchmark U.K. 18.1% 16.4% Europe ex U.K. 35.4% 41.3% Japan 18.9% 22.9% Pacific ex Japan 4.2% 10.9% North America 9.5% 8.6% Emerging Markets 13.8% 0.0% Not Classified 0.2% 0.0% Total* 100.0% 100.0% Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecom Services Utilities SECTOR ALLOCATIONS 15.1% 12.3% 8.3% 10.0% 6.7% 6.3% 17.5% 10.5% 8.9% 6.9% 10.5% 8.6% 8.6% 2.0% 4.4% 3.5% 3.4% 1.7% 3.0% NMIEX 15.5% 15.1% Benchmark 21.3%
NORTHERN FUNDS Sub-Adviser 4Q 2017 Review
Sub-Adviser Allocation and Portfolio Characteristics 4Q Ι 2017 SUB-ADVISER ALLOCATION Sub-Adviser WCM Investment Management 30% Victory/Trivalent 10% Causeway Capital Management, LLC 20% Wellington Management Company LLP 30% Brandes Investment Partners, LP 10% Target Allocation* Role in Portfolio A concentrated large-cap growth manager focusing on companies that possess a durable and growing competitive advantage. A diversified, small cap specialist manager with positive exposure to momentum and value. A fundamental, bottom-up, value manager. The portfolio is relatively concentrated with a preference toward yield and riskadjusted rates of return. A large-cap to mid-cap, contrarian value approach with a focus on companies trading at significant discount to current market price and strong balance sheets. A small mid-cap manager following a traditional 'Graham and Dodd,' bottom-up, value approach. PORTFOLIO CHARACTERISTICS Victory/ Trivalent WCM Causeway Capital Wellington Brandes NMIEX MSCI World ex USA IMI Index Wtd Avg Market Cap $4 Billion $76.7 Billion $70.5 Billion $46.6 Billion $4.9 Billion $47.2 Billion $50.2 Billion % EPS Growth - Past 5 yrs. 17.80% 12.45% 0.45% -2.33% 7.17% 7.74% 9.08% Positive Trailing P/E 18.38x 34.52x 20.17x 14.65x 18.14x 20.58x 18.81x Price to Book 2.06 2.31 1.66 0.95 1.10 1.55 1.79 Number of Holdings** 218 33 58 92 65 444 3,549 *Actual allocations may vary. **Currency positions are excluded. Portfolio composition may change at any time. Source: Wilshire Atlas 7 See page 12 for important disclosure information
Sub-Adviser Quarterly Commentary 4Q Ι 2017 CAUSEWAY CAPITAL MANAGEMENT Causeway s portfolio contributed to the fund s performance primarily due to positive stock selection in Consumer Discretionary, Consumer Staples, Energy, and Industrials. Security selection in the Materials, Health Care, and Information Technology offset a portion of the overall performance. Causeway notes that equity markets reached or were near all-time highs during 2017. These results were driven by momentum and cyclicality, despite record low volatility. Value, which typically moves in concert with cyclicality, was the worst performing style factor during the year. As momentum attracted more liquidity, pushing high-flying valuations even higher, areas of undervaluation became increasingly scarce. With minimal risk aversion and plenty of buying momentum, many investors stopped bothering with time-consuming fundamental analysis. However, price discovery and undervaluation invariably return to favor when the liquidity punchbowl is removed. Sobriety seems inevitable as some of the world s largest central banks have started withdrawing liquidity from global markets. Causeway expects this unwinding process to constrain and perhaps lower equity valuation multiples while raising the discount rate used in valuations. In this environment, they are most interested in investment candidates engaged in restructuring their operations ( self-help ) to become more efficient and more profitable while maintaining financial strength. They are steering clear of stocks that they believe have benefited from artificially low discount rates as those may be some of the first casualties of tapering global liquidity in this late stage of the economic cycle. They believe that their proprietary multi-factor risk model supports portfolio diversification if we see volatility rise from historic lows. Finally, in an environment of measured monetary tightening, Causeway thinks that dividend income should remain an important component of total return. VICTORY / TRIVALENT Victory/Trivalent s security selection was positive during the quarter and accounted for the majority of the portfolios performance. Excess returns were generated in all five regions and nine of the eleven economic sectors. Notable relative performance was generated in the Consumer Discretionary, Energy, and Industrials sectors. On the downside, security selection was weakest in the Healthcare sector. The portfolio s exposure to high-quality companies exhibiting improving business momentum and attractive valuations contributed to relative performance. Business momentum was the most helpful factor during the period. Victory notes that improving global growth and low inflation were the cornerstones behind the strong 2017 returns for international equities. Supported by rising corporate profits and improving balance sheets, the fundamental backdrop remains favorable for international equity markets. Accommodative fiscal and monetary policy across major central banks has supported synchronized momentum for the global economy. As a result, Eurozone economic confidence has reached its highest level since 2000, exceeding analysts estimates. Within Japan, business confidence reached a decade high, driven by strength in the manufacturing sector. Japan s businesses have benefitted from both increased domestic demand and rising exports, which should continue to attract foreign investors. From a geopolitical perspective, tensions between the United States and North Korea remains a key risk for global equities although investors have shrugged off the countries leaders most recent threats. Opportunities for relative outperformance remain, particularly among the diverse and broad segment of international small and mid-cap equities. Victory/Trivalent will remain focused on stock selection while adhering to our strict country and sector risk controls. 8 See page 12 for important disclosure information
Sub-Adviser Quarterly Commentary 4Q Ι 2017 WCM INVESTMENT MANAGEMENT WCM s portfolio returns were most robust in Information Technology, followed by Financials, Health Care, Industrials, and Materials. Consumer Discretionary was the primary weak spot for the portfolio. The manager s bottom-up sector biases worked against the portfolio although only slightly as Materials and Energy were the top two performing benchmark sectors. Stock selection in Health Care and Information Technology made up for the structural headwinds that were faced in the quarter. Regional attribution reveals that the slight underweight to the Americas (versus the MSCI ACWI ex U.S. Index)) was the only contributor. The strongest selections were found in Europe followed by the Asia/Pacific region. From a geographical allocation, the primary detractors were our underweight to Asia/Pacific and an overweight to Europe. The lack of any exposure to Africa and the Middle East also detracted. The manager continues to expect market volatility moving forward. Rather than attempting to predict macro or political events, such as interest rate moves, regulatory changes, geopolitics, the firm believes their time is best served preparing for the various outcome scenarios and teeing up their watch list to capitalize on the opportunities that emerge. Most importantly, they believe their quality growth approach is most conducive to an environment where volatility can result in great opportunities. Because they are focused on large, high-quality multinational businesses that have demonstrated their ability to navigate country-specific uncertainty, they are sanguine about their portfolio businesses with respect to tumult around the world. The manager also believes that their expectation of continued volatility going forward should keep the opportunity set interesting. Brandes Investment Partners Brandes Investment Partners was added to the fund during the fourth quarter of 2017. Commentary will begin in the first quarter of 2018. Wellington Management Company Wellington Management Company was added to the fund during the fourth quarter of 2017. Commentary will begin in the first quarter of 2018. 9 See page 12 for important disclosure information
Sub-Adviser Sector and Regional/Country Allocations 4Q Ι 2017 SECTOR ALLOCATIONS Victory/ Trivalent WCM Causeway Capital Wellington Brandes NMIEX MSCI World ex USA IMI Index Consumer Discretionary 15.6% 19.5% 10.0% 8.7% 25.2% 15.1% 12.3% Consumer Staples 5.5% 12.6% 5.6% 2.1% 20.4% 8.3% 10.0% Energy 3.5% 2.5% 9.6% 16.3% 0.0% 6.7% 6.3% Financials 11.7% 11.6% 18.3% 34.6% 10.1% 17.5% 21.3% Health Care 8.4% 13.6% 11.5% 5.5% 14.7% 10.5% 8.9% Industrials 22.3% 13.0% 17.0% 9.3% 17.5% 15.5% 15.1% Information Technology 11.2% 18.7% 7.2% 5.7% 1.2% 10.5% 6.9% Materials 10.2% 8.4% 8.4% 8.9% 5.3% 8.6% 8.6% Real Estate 8.3% 0.0% 0.2% 0.0% 2.1% 2.0% 4.4% Telecom Services 1.7% 0.0% 9.5% 5.1% 2.5% 3.5% 3.4% Utilities 1.2% 0.0% 2.7% 3.8% 1.1% 1.7% 3.0% Not Classified 0.5% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% Total* 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% REGIONAL/COUNTRY WEIGHTS Victory/ Trivalent WCM Causeway Capital Wellington Brandes NMIEX MSCI World ex USA IMI Index U.K. 17.0% 11.3% 32.3% 14.1% 19.1% 18.1% 16.4% Europe ex U.K. 36.9% 37.7% 35.1% 38.8% 18.0% 35.4% 41.3% Japan 24.5% 6.7% 13.7% 28.2% 35.0% 18.9% 22.9% Pacific ex Japan 7.0% 8.5% 0.2% 0.0% 2.3% 4.2% 10.9% North America 8.7% 17.1% 7.5% 4.9% 2.4% 9.5% 8.6% Emerging Markets 5.9% 18.8% 11.1% 14.1% 20.8% 13.8% 0.0% Not Classified 0.0% 0.0% 0.0% 0.0% 2.5% 0.2% 0.0% Total* 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% *The Total column may not sum exactly due to rounding. Portfolio composition may change at any time. Source: Wilshire Atlas 10 See page 12 for important disclosure information
NORTHERN FUNDS Appendix Disclosure of additional information
APPENDIX: DISCLOSURES Past performance does not guarantee future results. Total return is based on net change in NAV, assuming reinvestment of all distributions. Returns for periods greater than one year are annualized. Sub-adviser returns are represented gross of Fund expenses. Returns of an index do not reflect the deduction of any management fees, transaction costs or other expenses. Direct investment in an index is not possible. This presentation is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any funds. Information should not be considered investment advice, a recommendation to buy or sell any security or an endorsement of any underlying sub-advisers investment strategies. There is no assurance that the securities discussed are still in the Funds portfolio or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions or holdings discussed was or will be profitable, or that the investment decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein. Portfolio sector and characteristics comparisons are provided to illustrate sector allocations and characteristics for each Fund versus its respective benchmarks as of the date indicated. The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. In preparing this presentation we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Opinions expressed are those of the authors or individual investment managers and may not reflect the opinions of Northern Trust Corporation or its subsidiaries. Information is subject to change without notice. All indexes are the exclusive property of their respective owners, all rights reserved. Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. Northern Trust Asset Management offers investment products and services to personal and institutional markets. Shares of Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust. Not FDIC Insured May lose value No bank guarantee 12