The British market is heading towards a period of consolidation, which may lead to investors favouring defensive stocks and seeking the safety of larger-cap names. This is the view of Paul Jourdan, manager of the 45m First State British Smaller Companies fund.According to Jourdan, the smaller companies sector has come under a lot of pressure in the last couple of months. This can mainly be attributed to a lack of liquidity in the market, caused by many new companies entering the Aim market in particular, he says. Jourdan adds that there has also been a shift towards larger-cap stocks recently, as investors try to lessen the risk of their portfolios in the face of slowing economies and high global debt. Catherine Stanley, manager of the 86m F&C UK Smaller Companies fund, agrees, saying that some houses have already begun to see an allocation of cash away from small-caps. Many firms have moved away from what was an overweight position towards a neutral weighting in the sector. Underlying companies within the smaller companies sector, however, have been posting positive results and there have been more upgrades than downgrades recently, says Stanley. “What we have been seeing in terms of the small-cap sector being weak is related to technical factors rather than fundamentals,” she adds. Over the next few months, Stanley will be focusing the F&C fund on risk management and looking for more defensive growth plays. She currently favours support services, technology and healthcare because of their stronger balance sheets and encouraging numbers. The First State fund is invested primarily in the non-cyclical consumer goods sector as well as resources. According to Jourdan, the fund will retain its overweight in resources, because the sector still provides good buying opportunities. Currently, the top holdings in the portfolio are print management company Triple Arc, and resources firms First Quantum Minerals and Consolidated Minerals. The First State British Smaller Companies fund has returned 27.4% over one year to April 30, compared with the sector, which returned 18.4%. The F&C UK Smaller Companies fund returned 20.8% over the same period, according to Trustnet.