But the achievement went largely unnoticed as shareholders focussed on troubles in Goldman's fixed-income trading business instead. Even inside the investment management division there was little fanfare.

"We absolutely didn't have a party at a trillion," says Eric Lane, a Goldman partner who co-heads the group with Timothy O'Neill.

The number is a sign the business has regained its footing after the financial crisis, and comes at a time when it is becoming ever more important to Goldman's bottom line with a much higher return-on-equity than the trading operations.

Interviews with current and former Goldman executives, investors and clients show that the Wall Street bank is increasingly turning to investment management as the centrepiece of its growth strategy in the much more regulated banking world that is hurting returns elsewhere.

The bet on investment management is one of the first signs that, much like arch rival Morgan Stanley (>> Morgan Stanley), Goldman is coming around to the view that the years-long slump in fixed income trading is here to stay.

It has a long way to catch up its rivals. It trails JPMorgan Chase & Co (>> JPMorgan Chase & Co.), which had $2.5 trillion in assets under management on June 30. That business is the most directly comparable to Goldman's.

And while Morgan Stanley's investment management business had only $382 billion in assets at the end of the first quarter, the investment bank has a massive wealth management business - built on the brokerage services it provides retail clients - with $1.9 trillion in assets at the end of March. Goldman doesn't directly compete in that area.

Goldman's plan started as a turnaround effort for an asset management business hurt badly by the crisis, but have morphed as the bank's traditional profit drivers have come under pressure from regulation and lethargic markets, sources said.

Over the past few years, Lane and O'Neill have bought companies, hired people, launched new products and started lending to clients. In a joint interview, their first in years, they said they are not done yet.

"We certainly want the business to be bigger in every metric – revenues, pretax, performance statistics," said O'Neill. "But that will only happen if we perform for clients."

Goldman's investment management division is split into three roughly equal parts: private banking for the wealthiest around the world; asset management for institutional clients like pension funds and insurers; and distribution of Goldman funds to retail investors through third parties like Morgan Stanley and Bank of America Corp's (>> Bank of America Corp) Merrill Lynch.

On Tuesday, Goldman reported the business generated $1.4 billion in revenue during the second quarter, up 8 percent from the same period a year earlier. Assets under supervision rose to $1.14 trillion from $1.08 trillion the prior period. Goldman CEO Lloyd Blankfein highlighted the business as one that helped offset "less favourable conditions" in trading.

The business didn't get much management attention when trading was doing well, said SunTrust Robinson Humphrey analyst Eric Wasserstrom. "That's really changed in the past few years, and it's being highlighted now both in the operational performance and in management rhetoric," he said.

For example, when Goldman Sachs President Gary Cohn talked about growth prospects for the bank at a recent industry conference, he spoke almost entirely about opportunities in the investment management business.

To be sure, investment management is still dwarfed by Goldman's sales and trading operations. Last year, the division delivered 16 percent of Goldman's overall net revenue, compared with 46 percent from institutional securities.

But at a time when regulators are requiring more and more capital to be held against bond trading, investment management is returning much better results for shareholders. Bernstein Research pegs return-on-equity for Goldman's investment management business at 25 percent, compared with single digit returns in trading.

"MR. FIX IT"

Goldman's investment management business was hit hard by the financial crisis and its aftermath, suffering several high-profile blowups.

Its Whitehall real estate funds lost billions of dollars for clients and were ultimately worth pennies on the dollar. Its quantitative hedge fund, Global Alpha, dropped from a peak of $12 billion to just $1.6 billion before shuttering in 2011.

What's more, the division had to weather the fallout from scandals in the trading business, which made some clients suspicious about whether their interests were being put first.

O'Neill, 61, took on his current role in early 2010 to turn the business around. One former trader in the investment management business said that he is viewed internally as Blankfein's "Mr. Fix It" for problematic businesses, having spent time as Goldman's head of strategy before his current job.

But until the beginning of 2012, when Lane became co-head alongside O'Neill, the division had three other executives circle through as leaders - unusual turnover at a bank known for stability in its top ranks.

Lane, 40, has spent his career in Goldman's investment management business and has credibility within the team as a result, said the former trader.

Under their tenure as co-heads, the business has shifted from long-term outflows in 2010 and 2011 to net inflows since then. So far this year, the business has received $61 billion in net long-term inflows.

At the end of the second quarter, the investment management business had $1 trillion in assets under management, which its portfolio managers and private wealth advisers oversee directly. It also had another $135 billion in assets for which it earns an advisory fee, but does not have investment discretion.

GROWING BIGGER

Performance is solid but not stunning. According to Morningstar data provided by Goldman, 75 percent of client assets are in funds ranked in the top two performance quartiles on a three-year basis, and 63 percent of client assets are in funds ranked in the top two quartiles on a five-year basis.

Individual fund performance is mixed. The largest Goldman fund tracked by Morningstar - the $24.3 billion Goldman Sachs Strategic Income Fund , which makes bets across the bond market - is performing poorly, ranking in the 88th percentile against peers (where 1 is the strongest and 100 the weakest). However, its $381.9 million Large Cap Growth Insights Fund is doing very well, ranking in the third percentile so far this year.

Since 2011, Goldman has bought seven businesses bringing in a total of $59.5 billion in assets under supervision. But Lane and O'Neill say that while they have a partner dedicated to scouting potential deals for them, they would much rather grow the business the old-fashioned way.

The operation now has 5,000 front-office employees and continues to build out certain areas. For instance, it has hired some private bankers in Silicon Valley with backgrounds in the technology sector to grow lending to technology company executives, Lane said.

Last year, Goldman also received a U.K. banking license, and now plans to make its first international loan from that entity this month, he added. Goldman Sachs' lending book has grown to $15.4 billion at March 31, from practically zero before it became a bank holding company in 2008.

(Editing by Paritosh Bansal and Martin Howell)

By Lauren Tara LaCapra