INSIDE II - Institutional Fortitude

In the 40 years since we first began publishing this magazine in 1967, the role of institutional investors has grown inexorably and immeasurably, which is a good thing in many ways -- not least because we named the magazine after them.

In the 40 years since we first began publishing this magazine in 1967, the role of institutional investors has grown inexorably and immeasurably, which is a good thing in many ways -- not least because we named the magazine after them. In recent years they have become an ever greater force in the marketplace, driving change in areas like corporate governance, stock trading practices and alternative investments, as three stories in this issue show.

In this month’s cover story, Senior Editor Steven Brull gives us an up-close look at the California State Teachers’ Retirement System (“The Reeducation of CalSTRS,” page 38) and the extraordinarily effective job its chief executive officer, Jack Ehnes, has done in revitalizing this giant, now the nation’s second-biggest public fund. Long in the shadow of its sibling and crosstown rival, the California Public Employees’ Retirement System (CalPERS), CalSTRS, under Ehnes’s tutelage, has emerged as a power in its own right, pursuing an activist governance agenda with gusto. It has stood up to Governor Arnold Schwarznegger when he tried to terminate defined benefit plans for teachers and other state workers, has instituted a tough new ethics policy and, along the way, turned around its investment performance. Now Ehnes and CalSTRS must find a way to navigate treacherous political waters and narrow a troubling funding gap of some $20 billion. One answer: alternative investments.

That’s an arena many institutions are exploring, and few have had as much success as Goldman Sachs Asset Management. In “Inside the Mint,” beginning on page 68, Senior Editor Jo Wrighton describes how Goldman has, over the past decade, built an investment powerhouse by fostering a boutiquelike culture and focusing heavily on quant-based alternative strategies. From having $46.3 billion in assets under management in 1995, Goldman had gone to $719 billion by the end of February; an extraordinary $147 billion of this was in hedge funds, private equity funds and the like, making the firm the biggest manager of these lucrative alternative strategies in the world. As Wall Street rivals are seeking to imitate the strategy by buying up hedge funds, Goldman’s performance has slipped. But with investors clamoring for these strategies, the firm remains as commited as ever to the approach that has fueled its growth.

Even as institutions have grown their assets, they’ve trained a weather eye on their costs. The result, Staff Writer Pierre Paulden explains in “Daggers, Dark Pools and Disintermediation,” beginning on page 60, is a sweeping transformation of the way stocks are traded. Gone are the days when loud-mouthed men brayed into their phones as they traded big blocks of shares. In their place are quietly humming computers programmed with complex algorithms. The noise level is down, but the amount of trading is soaring -- as is the power of the institutional investor.

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