Technology Fund

Technology

as of March 31, 2013

Information technology (IT) stocks advanced during the first quarter but at a much more muted pace than the market as a whole, as fourth-quarter 2012 earnings and guidance for IT companies were weak. The typical year-end IT spending flush failed to materialize, and corporate demand stalled in response to macro headwinds. When economic growth slows, corporations tend to curb IT spending to protect their bottom lines.

The Technology Fund posted a total return of 4.98% for the quarter, compared with 10.61% for the Fund’s benchmark, the S&P 500® Index. The IT sector was the market’s weakest, and with the majority of the Fund invested in this sector, performance lagged the broad-based benchmark. The Fund also had exposure to the healthcare sector, which contributed favorably to relative performance due to stock selection.

The legacy-technology laggards and other underperformers of 2012 outperformed their growth-oriented peers during the quarter. Given the narrowing valuation gap between legacy and growth, and assuming a stable macro backdrop, we favor the secular growth names in anticipation of a rebound in demand later this year.

We remain positive on the technology sector based on shifts toward cloud-computing, mobility and big data analytics; attractive relative valuations; ongoing market consolidation; and sound balance sheets and sustainable cash flow, which are driving higher dividend payouts and providing defensive characteristics. Risks include potentially rising component costs, continued pressure on ASPs (application service providers) in hardware and software; high offshore cash balances, which limit financial flexibility; and currency volatility, given the sector’s high exposure to international markets.

If you're a growth-oriented investor intrigued by the appreciation potential of technology-driven companies, you may want to explore the opportunities this Sector Fund offers. It is designed for investors with a long-term time horizon, who are willing to withstand inevitable short-term market swings and who understand the risks and potential rewards of sector investing.

Buy stocks that develop, produce or distribute products and services related to technology.
Base stock picks on financial condition, market share, earnings growth rates, product leadership or market niches, as compared to competitors, market valuation and price trends.
In addition to traditional technology companies, the Fund may also invest in biotechnology, health care and health care equipment, aerospace and defense and financial administration.

Not FDIC insured | May lose value | No bank guarantee

*View investment term definitions

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.