The ASX sector tipped to be February reporting season's surprise story

They've been beaten-up, washed out, and written off as structural losers, but some of Australia's top stock pickers think the fund managers will prove a shareholder winner this earnings season. 

The contrarian call is underpinned by stocks' bull run over the second half of 2024, with central banks' interest rate easing cycle expected to boost animal spirits as funds flow into the asset managers in 2025. 

Pinnacle Investments is expected to get the show running on February 5 by revealing bumper performance fee profits from its co-owned affiiliates that include Tesla-backer Hyperion Asset Management, bond manager Coolabah Capital, and private credit pioneer Metrics Credit Partners. 

"Pinnacle's had a big run, and there's a potential for an earnings beat," said Chris Stott a portfolio manager at 1851 Capital.  

The market is also sniffing out this prospect as shares in the asset management bellwether hit a record high of $25.67 on Tuesday, to advance a blockbuster 60 per cent over the last six months.

The bull run over the second half of 2024 should prove an earnings tailwind across fund managers and other investment platforms such as Hub24, Netwealth, according to Dean Fergie a portfolio manager at Cyan Investment Management.

Last week, Hub24 revealed net inflows into its platforms soared 31 per cent over the December quarter, with total funds under administration up 33 per cent to $120.9 billion. The stock has responded by adding 104 per cent over the last 12 months to a $6.3 billion valuation. 

"Hub's on fire and and the [investment] platforms are looking good as investor confidence is not too bad," said Mr Fergie. 

"The fund managers have been through the ringer, but even the strugglers like Magellan and Platinum maybe have more upside than downside now. 

"We know there's also the ones with strong momentum, Regal had a big jump in FUM (funds under management) recently, and they all may get organic growth on stronger markets and more investor interest in the sector." 

In the micro-cap space, Mr Fergie likes micro-investing app Raiz. 

On Tuesday, its share price jumped 6.4 per cent as the fintech reported active customers grew 8.5 per cent in the December quarter to 317,995 on average revenue per user up 6.4 per cent to $75.68.

Rotation out of bank shares into miners?

Among the blue-chips, investors should watch for signs of a highly-anticipated rotation out of overvalued bank stocks into cheap mining stocks if Beijing moves to stimulate China's struggling economy, according to Mr Fergie. 

Powerful superannuation investors and macro-focused asset managers piled into bank stocks and dumped miners in 2024 on worries the record-breaking falls in Chinese government bond yields and property prices signaled trouble for China's economy, he said. 

However, that data-dependent-trade could reverse anytime in 2025. 

"So resources versus banks, if you're a big macro fund is relevant," Mr Fergie said. "[US President] Trump is also pro-resources in what could be an inflationary cycle. So you could make an argument that rotation is a logical bet in 2025. Once reversed, we've also seen how momentum can run in these big stocks, with people chasing their tails for performance."

Interest rate cut winners

Elsewhere, investors will scour ASX profit reports for clues around how rising living costs are dampening the confidence of mortgage holders praying for interest rate cuts in 2025.

Stott expects unloved car dealer AP Eagers to surprise investors as it benefits from more people changing cars and lower interest payments on its balance sheet debt. 

The stock picker is also bullish on fast-fashion retailer Universal Stores, which has more than doubled in share price since its 2020 initial public offer at $3.80 per share. 

"Inflation has come right down," Mr Stott said. "So that should get reflected in better margins for companies that have the ability to bank this from a competitive standpoint."

Mr Stott's 1851 Emerging Companies Fund has returned 13 per cent per year net of fees and expenses since inception, versus 3.4 per cent for its benchmark the S&P/ASX Small Ordinaries Accumulation Index.