Where is the clamour of investors calling for Saudi Aramco to list in their jurisdiction? Politicians, exchange executives, lawyers and bankers all see benefits from helping the national oil champion sell stock. Prestige, relevance, trading volumes and fees beckon, if the world’s largest extractor of crude oil becomes a public company late next year as planned. Yet recent proposals from the UK regulator to ease the way for a London quote, by removing some governance requirements for state controlled companies, prompted several asset managers to adopt a posture of principled outrage. Royal London said such changes would be “bad news”. Standard Life sees no advantages to having 5 per cent of Saudi Aramco listed on the UK market. The Investment Association, representing several big name businesses, criticised the loss of “important investor protections”. The position is odd for a beleaguered industry to take. Yes, listing standards matter, and a supposed distinction between the motivations of governments and oligarchs in control of companies is fuzzy at best for countries in a pre-democratic phase of existence. What Saudi Aramco offers, however, is a unique experiment to prove the value of active fund management.
With money pouring into passive index funds, every professional investor should surely be champing at the bit to make a decision about how much (or how little) Saudi Aramco stock to buy. The situation arises because the Saudi authorities plan to not seek membership of stock market indices, for a mix of political and practical reasons. Were a company like Saudi Aramco to join an index such as the FTSE 100, unwitting widows and orphans who use index funds would be forced to invest. Choosing not to forestalls such complaints. It also avoids other potential problems of how to weight Saudi Aramco in an index: a $1tn market capitalisation — towards the lower end of mooted valuations for a group that pumps one in every nine barrels of crude oil — is equivalent in size to the 75 smaller members of London’s flagship index. FTSE Russell has also said no to softening rules on index inclusion, which require a quarter of shares to be freely traded for a UK company, and half for one incorporated elsewhere. Index providers could use an “investability weight”, counting only stock in public hands, as happened when the mining group Glencore listed 12 per cent of its shares in 2011. Such an approach complicates index construction: imagine the difficulty if the Saudi government one day decided to distribute a tenth of the company to its citizens and so triple the amount of stock available. Also, focus for a moment on the investment decision for a UK fund manager were Saudi Aramco stock available but not essential to buy. Not taking a view, or merely tweaking the standard index allocation, will not be an option. Refusing to buy could be a defensible early position. Governance questions must be central to the investment decision, not handed off to specialist hand wringers with worthy but vague remits. The weight of future stock to be eventually sold, Middle Eastern stability, or the impact of electric cars could also provide reasons to avoid. Facebook, another long expected and much hyped listing, had a tough first year on the public markets.
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Still, in year two Facebook stock more than doubled. At times, buying Saudi Aramco shares not included in the FTSE indices could easily be a way to top rankings of investment performance, or simply beat the performance of low fee tracker funds. At the very least, investors will have to decide whether to buy Saudi Aramco in addition to energy groups BP and Shell, or instead. Anyone paid to pick stocks or manage money will be required to have a view on succession in the House of Saud, the effect exports of US shale oil have on prices, and where dividends to shareholders rank in the priorities of a nation state. So as well as being the biggest, the nature of a Saudi Aramco listing means it would also be the most closely scrutinised in history. The UK authorities may have rolled out a red carpet for the company, but they have also started to build a very public stage on which professional investors will succeed or fail.