Multi-Manager Small Cap Fund

Multi-Manager Small Cap

as of June 30, 2010

Despite a strong start, the second quarter of 2010 ended with indices down across the capitalization spectrum. Small-cap stocks were no exception and posted the worst second-quarter return in their history, declining 9.9%. The Russell 2000® Index has declined more than 18% from its recent high. Within the small-cap area, utilities were the top performing sector, declining 2.9%. The more cyclical consumer discretionary sector was among the worst performing areas, down over 13%. From a style perspective, growth outperformed value, with the Russell 2000 Growth Index returning -9.22%, compared with the Russell 2000 Value Index return of -10.60%.

The Multi-Manager Small Cap Fund outperformed during the quarter, with a return of -8.82% versus the benchmark return of -9.92%. Stock selection in the Fund was relatively strong, particularly in the financials and healthcare sectors. Sub-adviser Riverbridge's conservative approach, focusing on high-quality growth companies without debt held up particularly well during the quarter, outperforming by over 300 basis points (3.0%).

During the quarter, we removed one sub-adviser from the Fund and added two new sub-advisers. Quantitative manager OFI Institutional was removed and replaced by two new managers, Denver Investment Advisors (DIA) and Hotchkis & Wiley (Hotchkis). DIA employs a value strategy with a focus on dividend-paying companies. Hotchkis uses a traditional value approach, looking for significant discounts in valuation that they believe are temporary. By adding these two sub-advisers, we increased the Fund's overall value exposure, creating what we believe is an improved style balance in the Fund.

If you're a long-term investor looking to diversify your investments by pursuing the growth potential of small-company stocks, then this Fund may be right for you. It is intended for investors who are aware that small-company stocks are generally riskier than large-company stocks due to greater volatility and less liquidity.

Invest in small-cap stocks through a variety of external small-cap managers who have distinct investment styles and strategies.
Select complementary managers from a broad universe of investment managers.
Blend managers into a single fund in an effort to provide the best combination of risk and return.

Not FDIC insured | May lose value | No bank guarantee

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Please carefully read the prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus, which contains this and other information about the funds.