We think there are still some structural flaws in US and UK banks yet those stocks have rebounded. People have seen what they described as green shoots, we are a little bit more worried they’re actually weeds.” While the asset class ranges only changed slightly (up or down 1 per cent) the fund also created a new absolute return asset class. “We’re concerned about wanting to get more inflation protection in the portfolio. This will be in the form of global TIPS and then later we will look at infrastructure and are building up our local infrastructure team.”

CalSTRS is working cooperatively with CalPERS and some of the large Canadian pension plans with co-investment a possibility. “We describe it as a kind of London Club which can work cooperatively on deals rather than compete against each other.” The fund made two changes to its long-term outlook in February, creating a taskforce – the equity return committee – from a combination of the real estate, fixed income and private equity groups, to look at distressed debt opportunities. The board has approved up to US$6 billion in these opportunistic investments. “We were starting to see opportunities in those asset classes, and wanted to create a rigid fixed income analysis of all of them.

With capital being so scarce we really wanted to harness the talents of all of our team,” he says. “We are not interested so much in distressed debt, but distressed sellers. What is interesting is there was such a rush for government to sell toxic assets in the banks back in March, but we haven’t seen any activity until just recently. We just started meeting with the nine firms that have been approved by the US government in the PPIP program. “It is still questionable whether the banks are going to be willing to sell all this debt that they hold. I have said I am not interested in buying toxic debt but I am interested in buying debt that can be worked out at the right place.”

CalSTRS’ annual returns for 2008 are very disappointing, Ailman says. “This year is clearly disappointing, the most difficult of my career. I am personally very disappointed we weren’t able to protect more capital,” he says. “I wouldn’t be human if I didn’t second guess myself constantly, but what I have said to the board and I constantly say to the members, this is a marathon not a sprint. We design the portfolio to do well in decent global growth. If you designed a portfolio to protect capital in this one year out of 70 you would underperform dramatically the rest of the time.”