Enhanced Large Cap Fund

Enhanced Large Cap

as of June 30, 2010

The market fell in the second quarter reversing an upward course set last March. Significant concerns arose about sovereign debt, financial regulatory reform and economic growth. Initially, the market seemed to shrug these concerns off with undeterred momentum and low volatility. Eventually, investor concern grew, volatility rose and markets declined. Predictably, rising volatility has favored higher-quality, lower-beta stocks as the market falls, at the expense of riskier value stocks.

The Enhanced Large Cap Fund returned -11.69% for the quarter, slightly underperforming the S&P 500 Index return of -11.43%. Stock selection was a slight negative for the Fund's performance while sector weightings were essentially neutral in impact. Stock selection was strongest in the healthcare sector, led by service providers. This was offset by negative stock selection in the industrials sector, driven by picks in the aerospace and defense industries. Consistent with our process, we have adjusted our tactical model weights, decreasing value exposure with offsetting increases in quality and momentum. While we have been moving in the right direction, value remains our largest exposure and its underperformance detracted from relative return.

We continue to believe that higher-quality stocks are relatively undervalued while also providing insurance against a macroeconomic downturn. Accordingly, we have continued to increase our exposure to stocks with historically higher levels of profitability, lower leverage and consistent results. Should the environment continue to improve, the undervaluation supports a leadership change toward quality stocks. At the same time, if conditions deteriorate, these stocks stand to potentially benefit from any ensuing flight to quality.

If you're seeking a low cost, disciplined approach to investing in equities, this fund may be appropriate for you. It seeks long term growth of capital and dividend income and invests primarily in a broadly diversified portfolio of established, large-cap companies. The Fund is intended for use as a core equity investment.

Use a multi-factor proprietary quantitative stock selection model with the goal of providing additional total return versus the S&P 500® Index.
Create a portfolio with risk, style, capitalization and characteristics similar to the S&P 500® Index while potentially providing excess returns by overweighting or underweighting stocks that have the potential to achieve the Fund's objective.
Sell securities when they are no longer attractive based upon evaluation criteria, such as valuation, price momentum and earnings quality.

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.