Blueprint interview: Mr Diversity

Joe Azelby, a one-time professional American football player, has built JPMorgan’s core US real estate platform into a global real assets business with $60 billion under management. In an interview with PERE, he explains why he is a fan of diversity, why investors need to change their attitude towards allocation and why he ultimately is glad that his football career was short. By Robin Marriott. PERE Magazine June 2012 issue.

Azelby: business builder

Joseph Azelby, the head of global real assets at JPMorgan Asset Management, runs a business with $60 billion in assets and about 400 dedicated professionals for the largest bank in America. In American football-speak, he is the quarterback of a big-time team that manages real estate, infrastructure and other real asset strategies on behalf of a huge number of institutional investors in the Americas, Europe and Asia.

The football analogy is particularly relevant because Azelby’s career began not in the financial services sector, rather in the unlikely world of professional American football.

In an interview with PERE about JPMorgan’s platform, Azelby first talks about how he was born in the northern Manhattan neighbourhood of Inwood, raised in New Jersey and turned out to be both academically and athletically gifted. His hardworking father, incidentally, was a New York City police officer who sometimes moonlighted as a stage hand, taking down sets at famous theatres such as the Metropolitan Opera. When his father retired from the police force, he went to work full time in the theatre business. His mother, meanwhile, had been working as a substitute teacher at the nearby St. Mary’s elementary school that Azelby attended, and he says that as a kid he was academic. Indeed, he was strong enough with the books to make it to Harvard University to earn a bachelor’s degree in economics and to New York University’s Stern School of Business for an MBA.

At first, however, Azelby’s heart lay not in financial services, but in the world of sport. Harvard and the Ivy League universities in general produce relatively few professional American football players, but Azelby’s boyhood dream was nevertheless to make it in professional football. And, at the end of his time at Harvard, he got the chance to realise that dream.

That was a pivotal time for Azelby because he made a decision which he says shows through in the fundamental approach one can see at JPMorgan’s global real assets business today – the benefits of diversification.
As a player, Azelby had caught the eye of scouts and was invited to the NFL Scouting Combine to undergo the rigorous tests of physical and mental strengths required by the professional teams. He ended up drafted by the Buffalo Bills as a linebacker in the 10th round. [Azelby jokes that the 10th round doesn’t even exist anymore, as the league reduced the draft down to seven rounds in 2010.]

Nevertheless, Azelby made it to Buffalo in 1984 for a full season at the beginning of what was to become a brief career in the game. At Buffalo, he jokes that he had a “big disagreement” with the coach. “The disagreement was that I thought I was good, and he didn’t!” he says.

After leaving Buffalo, Azelby signed with the San Francisco 49ers. However, because he had broken his foot in Buffalo, the 49ers released him. He then was picked up by the Indianapolis Colts, where he agreed to sign a waiver regarding a shoulder injury.

Hedging his bets

Before he was signed by Indianapolis, Azelby had started to ‘diversify’ his life by putting to use his Harvard education. He had started working for Manufacturers Hanover Trust, but he “still had the itch” for American football and left for training camp with the Colts, he explains. He ended up back at the bank though.

Azelby notes that he wasn’t happy about having a short professional football career. Still, it is something he is happy about in retrospect given that he doesn’t suffer the chronic pains that go with a lengthy football career. “Also, I probably wouldn’t have the job I have today,” he says.

Joseph Azelby
Born: 1962
Firm: JPMorgan Asset
Year joined: 1986    
Current title: Head of global real assets
Previous occupation: professional American football playe

Moreover, Azelby’s previous decision to go to college showed the benefits of diversity. “I am a big believer in diversification,” he says. “I wanted to play professional football since I was a little boy, but when I got the opportunity to go to Harvard, that was a great hedge. Even in the off-season, other guys were probably lifting more weights and running more sprints, but I was working an internship at Manufacturers Hanover Trust (now part of JPMorgan).”

Azelby next spent a couple of months at Drexel Burnham Lambert, the Wall Street investment bank that was to go bankrupt in 1990. However, apart from a short spell at Drexel, he has spent almost his entire career at JPMorgan, having joined the bank in 1986. He spent nearly the first half of his career in fixed income and later got the chance to run the real estate group in 1998. Nowadays, he is responsible for the real assets group’s global business vision, strategy and execution and chairs the group’s global management committee. He also is a member of the bank’s asset management investment and operating committee.

Business builder

When Azelby began running JPMorgan’s real estate business in 1998, it was focused primarily on core real estate and almost exclusively in the US. “As I said, I am a big believer in diversification. So when I came to the business, I saw that we only had one product, real estate, and one client base, US pension funds. If something happened to either of them, it’s game over,” he says. “If you look at our business now, we are running it as we think our clients should, which is to continue to increase the diversification in their portfolios.”

The first thing JPMorgan needed to do, according to Azelby, was to broaden the client mix. As a result, the business created products that investors could participate in from different parts of the world – an effort that began around 2001. That’s when opportunities began to open up.

One of those opportunities was Pete Reilly, who was working at Peabody Global Real Estate Partners. He joined Azelby’s group, providing JPMorgan with an immediate European platform. Over the last few years, the European side of the business has completed something in the neighbourhood of $4 billion in deals, including a 2009 deal to sell HSBC tower in London’s Canary Wharf to the National Pension Service of Korea, Azelby points out.

Next, the global real assets business added major India and China real estate platforms, as well as different asset classes for investors, including infrastructure, maritime and other strategies. It now manages funds and other vehicles for a varied client base in the US, Asia and Europe. For example, it counts Asian sovereign wealth funds alongside more than 250 pension funds as clients.

The dawn of Junius

Despite all of that diversification, it wasn’t until last year that the world of real estate opportunity funds really sat up and took notice. That is when JPMorgan hired John Fraser, the former co-head of real estate at Investcorp, to launch an opportunistic investment platform called Junius Real Estate Partners, which is named after John Pierpont Morgan’s father.

Asked why JPMorgan made the decision to start an opportunistic platform, Azelby points to the 20 percent to 30 percent decline in US real estate prices that it saw at the time and the volume of overleveraged real estate in need of recapitalisation. “Never before had we seen the spread between the best core assets and all other real estate this wide,” he says. “So the opportunity is to buy properties with issues and turn them into core.” He argues that one doesn’t need to believe in a rapid rebound in the economy in order to make that strategy successful.

Still, Azelby agrees that, in the US, the platform has a “branding challenge.” That is because, when people think of JPMorgan’s US real estate business, they associate it with the largest open-ended core fund in the industry, JPMorgan Strategic Property Fund. As a result, the firm made a decision to create a separate platform and give it a separate brand in order to treat it as a new venture, with a separate and distinct investment team, but supported by the global real assets platform.

Despite such deliberate measures, things haven’t been all that easy for Junius. In March, the Wall Street Journal erroneously – according to JPMorgan – reported that the platform ceased efforts to raise a $750 million commingled fund, Junius Real Estate Partners I. Sources familiar with the platform report that, instead of just raising a blind fund, Junius is doing single deals and offering them directly to clients who prefer that format. This is the kind of strategy that many firms are adopting in order to show potential investors what a team is capable of.

The decision seems to suggest that potential investors are viewing the Junius platform as being new and, as yet, untested. It also shows that some investors do not want to commit to blind-pool opportunistic real estate funds, let alone first-time funds. Either way, it implies that JPMorgan came to the market too early with its opportunistic fund.
While Azelby wouldn’t comment on the Wall Street Journal article or Junius’ change in strategy, he notes that investors are still trying to get over the events of 2008 and 2009. “They are de-risking and taking in core, and we are living proof of that,” he says, insisting “this team is going to be very successful whatever its format is.”

The 25 percent target

For Azelby, the issue of strategic focus is just part of the big picture that he wants to hammer home. Indeed, he doesn’t think investors have enough real estate, and they don’t own enough infrastructure or other real assets either. It is all about diversification, which is why JPMorgan Global Real Assets offers all these different asset classes and is looking at adding others.

Infrastructure debt is one of the latest units to be added, Azelby notes, and he thinks his business will become more active in US mezzanine real estate debt as well. The argument continues, however, that investors will begin to see things differently than in recent years.

“I say it, and other people say it – diversification really is the only free lunch in investing,” Azelby says. “The world has changed, with interest rates are at unbelievably low levels and equity volatility quite high. The 60:40 stock and bond mix and the 50:35:15 alternatives mix are no longer enough. We are referring to it as the ‘realisation’, which is a play on real assets and also that people need to be aware that the way they used to organise and allocate their portfolio is not going to get it done anymore. We are saying; ‘You will not hit the returns that your actuaries have set out for you, whether that is 7 percent or 8 percent’.”

Azelby continues: “Our message is to go out and show that the types of things we do can deliver more income than bonds, deliver equity-like returns and provide inflation protection – all the things you once could do with the equities market. We need to move investors from thinking 5 percent real estate and 3 percent infrastructure to 25 percent in real assets. Therefore, we are going to make that collection of assets as broad as possible to deliver it.”

Azelby says the 25 percent figure is not fantasy. He also believes that the days of labelling property and infrastructure investments as ‘alternatives’ are numbered. That is because long-term investors are going to move from 5 percent or 10 percent today to a 25 percent allocation with more asset types, he says.

Of course, not every investor is thinking like this, but Azelby insists that some investors have had the ‘realisation’. He says the investors that have had the realisations are most notably Canadians and Australians, given the emphasis they put upon infrastructure and real estate. “They are going out assembling large portfolios in real estate, infrastructure, timber, agriculture and long-life transportation assets,” he adds.

Azelby agrees that private equity firms adding various asset classes to their business are also part of the same story of diversification. Indeed, such firms can be seen as competitors to JPMorgan. In every different segment the bank operates, it will have a competitor, Azelby explains, adding that the firm that his business has been watching most closely is Brookfield Asset Management.

The burdens of being a bank

Currently, JPMorgan is the largest bank in the US and, save for a recent embarrassing episode in which it lost more than $2 billion of bank capital in the credit markets, it has fared as one of the strongest banks, if not the strongest, to emerge from the carnage of 2008. It also finds itself operating at a time when many of the real estate investment management businesses of other financial institutions have closed up shop or seem to be winding down.

“I think we are unique in that we have a huge commitment to the asset class,” Azelby says. “Our real estate business has always been part of the fiduciary side to the organisation – that is where its roots are – and I think the fiduciary nature of the business is what gives it the staying power. It is part of a much wider commitment to manage assets on behalf of other parties.”

Of course, some other banks have felt the same way about their real estate offering but seemingly have been persuaded by the likes of the Volcker rule to offload businesses. Deutsche Bank said last year its decision to sell RREEF Real Estate, as well as other parts of its global asset management group, was linked to the regulatory environment.

Apparently, when it comes to the Volcker rule in particular, JPMorgan does not see the need to make such a drastic decision. Azelby puts his finger on the issue of fund sponsors being limited to 3 percent co-investment in the funds they manage. “For the clients we have spoken to so far, they understand it’s because we are regulated,” he says.
With that, Azelby is off, soon to be travelling from London to Asia and elsewhere to meet clients and potential clients. Professional football may have been his first love, but he certainly would never have travelled so much if he had stayed in that career. For now, he is happy to clock up air miles in the name of diversification.

JPMorgan Asset Management – Global Real Assets
Headquarters: New York
Offices: 13 cities in the US, Europe and Asia
Key  figures: Joseph Azelby (head), Kevin Faxon (Americas real estate), Peter Reilly (European real estate), David Chen (Asia real assets), Mark Weisdorf (infrastructure), Andrian Dacy (global maritime) and John Fraser (Junius Real Estate Partners)
Real assets professionals: 400
Asset classes: US real estate, European real estate, China real estate, India real estate, OECD infrastructure, Asia infrastructure, maritime, special opportunities
Total assets under management: $60 billion

Joseph Azelby
Born: 1962
Firm: JPMorgan Asset
Year joined: 1986    
Current title: Head of global real assets
Previous occupation: professional American football player