NETHERLANDS - Rob Bauer, former head of research at ABP, has added his voice to the growing criticism of sell-side analysts. He says they tend to exaggerate estimated annual report figures.

Bauer, professor at Maastricht University and head of the new Netspar-University of Maastricht Business School (UMBS) Academy - established to address global issues of the pensions and insurance world - argues that investors react negatively because the expectations that analysts raise are not met.

"Analysts tend to exaggerate. They either estimate profits too high, or losses too low," Bauer told IPE.

Bauer also found that analysts also display herd behaviour. He said: "There are about 15 top analysts who know everything about a certain company. The rest looks at them."

 "Although pension funds have a long term horizon in which this trend should not matter, the portfolio manager at an institutional investor is only human and has often a shorter horizon," he added.

The investment research company Starmine confirms Bauer's view, finding a trend in which analysts are generally over-optimistic.

"In a recent StarMine study of historical analyst forecasts in the US, we found that if you were to extrapolate analyst estimates based on their fiscal year estimates and long-term growth rate estimates, you would arrive at an average compound annual growth rate of 19.8% over a five-year period," said spokeswoman Mary Morgan. 

"This is considerably higher than the 11.8% compound annual growth rate that was actually realised by those companies in the study and we have seen similar patterns in other regions," she added.

The StarMine study compared estimates made between 1993 and 2000 with actual results that were reported between 1998 and 2005. "Since the study looked at the accuracy of long-term growth estimates, we compared estimates made in any given year with results reported five years later," Morgan explained.