The chairman of the Allan Gray unit trust management company, Edgar Loxton admits to having been surprised by the extent and speed of the recovery in share prices, and insists that his company's 'bottom-up' company analysis makes them less optimistic about the earnings prospects for many South African companies.

"As a result, our funds have continued to lower their allocation to shares in South Africa," he says in his unit trust annual report to the end of December 2009, circulated on Monday although the report is due to be in investors' hands by the end of March.

"Our portfolio remains overweight high-quality, defensive companies such as SABMiller and British American Tobacco and underweight global and domestic focused cyclical companies such as the diversified mining companies, construction companies and retailers."

He points out that the bias towards defensive companies resulted in the company's funds lagging their benchmarks ? the Allan Gray Equity Fund returned 21.6 percent compared to the market's return of 32.1 percent in 2009.

"This relative equity underperformance, together with our cautious asset allocation, resulted in a return of 14.0 percent for the Allan Gray Balanced Fund, versus 16.5 percent for the average fund in the sector," he said.

"The Allan Gray Stable Fund continued to provide capital stability to investors, returning 5.6 percent in 2009."

Loxton added that lagging a strongly rising market is not unusual given Allan Gray's investment approach, and they continue to focus their efforts on identifying the most attractive long-term investments based on bottom-up fundamental research.

"We believe this approach will deliver superior returns to clients over the long Term," he insisted.

"However, we caution that the timing and magnitude of performance is unpredictable over the short term. This may even be truer today given the imbalances present in the world."