(FORTUNE Magazine) – When we last checked in on Michael Larson, the man who runs Bill Gates' money, Larson was managing a mere $11.5 billion and Gates was just beginning to get his philanthropic efforts in gear. Five years later Larson runs about $44 billion, some $17 billion of which is Gates' personal fortune, not including Microsoft stock (Gates owns another $29 billion in MSFT). The remaining $26.8 billion in Larson's portfolio belongs to the Bill & Melinda Gates Foundation, by far the biggest foundation (by assets) in the world. If the press-shy Larson, 44, was a big deal when I wrote about him in 1999 (see fortune.com), he surely is a bigger deal today.

Almost as impressive as the size of the portfolio is the remarkable job Larson has done investing it. It's true that last year his portfolio was up only about 17%, which compares unfavorably with the S&P 500 (up 22% in 2003). But you may remember that Larson is an extremely conservative investor who would naturally underperform in boffo years. "I don't consider it so bad because we basically didn't own any stocks," explains Larson, who has joined other nonprofit boards and committees at Claremont McKenna College, the University of Washington, and the United Negro College Fund. The picture brightens if you look at Larson's numbers over three years, in which he generated a compound annual return of more than 10% (compared with --12% for the S&P). And over the past five years he returned nearly 9% annually (vs. --3% for the S&P).

This has all been very good news for Larson's boss, Mr. Gates. Let's look at the numbers. First you should know that in the past five years MSFT has gone from about $38 to around $25 --down more than 34%. So getting out of MSFT and into any asset that was appreciating was a home run. In the spring of 1999, Gates owned 18.5% of Microsoft (down from 44% after the company's IPO in 1986), or some two billion shares, worth $76 billion. Today he owns 10.75% of Microsoft (or 1.163 billion shares), worth $29 billion. Add that to the $44 billion Larson runs (both personal money and foundation money), and you get $73 billion. (If Gates had never sold any of those two billion shares, they would be worth only $50 billion today.) And let's not forget, the Gates Foundation has given away more than $4 billion in the past four years.

"It shows diversification works," says Larson. "Bill sells 20 million shares of MSFT each quarter. When you did that article five years ago, over 90% of Bill's holdings were in Microsoft. Today it's down to 60% or so." True, some of that shift is because Microsoft has fallen, but overall, Larson's strategy has served Gates well. So how did Larson do it? "We didn't have any silver bullets," says Larson. "We just try to be smart. Last year we invested in Japan, which I thought was cheap, and that worked out well. We had a big bet in nondollar investments. Commodities worked out, and so did TIPS [Treasury inflation-protected securities] and high-yield bonds."

Question: Are we near the high-water mark of Larson's operation? In other words, at some point Gates might stop selling stock, and he might give away much of his money. "I can't speak for Bill, but he has continued to sell Microsoft," says Larson. "And if you assume that the payout of the foundation is 5% annually, to the extent that I exceed that, the portfolio keeps growing. Of course, Bill may stop selling or he may give more than 5%." What if Microsoft decides to distribute its $53 billion mountain of cash to shareholders? In the unlikely event that the company pays out all of it, Gates--and Larson--would receive nearly $5.7 billion.