André de Souza

Associate professor of finance, Tobin College of Business, St John's University

Visiting scholar (honorary), Stern School of Business, New York University

Curriculum Vitae: adesouza_cv.pdf

Contact information: Department of Finance and Economics,
Tobin College of Business, St John's University
101 Astor Place
Room 220, New York NY 10003.

Phone: +1-212-284-7023

Email: desouzab@stjohns.edu

St John's "R club": Materials here

A SAS tutorial: SAS for finance PhDs

Published papers:

"Selection effects in the births of mutual funds". Journal of Financial Research 2025
SSRN Published version

New funds tend to hold stocks held by other popular funds. Such catering funds underperform. Underperformance can partly be explained by competitive entry: popular strategies see ``too much'' entry resulting in underperformance of all funds, newborn and existing, located there.

"Are enhanced index funds enhanced?", with Edwin Elton and Martin Gruber (both NYU Stern). European Financial Management 2022
SSRN Published version Summary at the Harvard Law School forum on Corporate Governance

On average, enhanced index funds do about as well as index funds, but index funds with low expenses outperform enhanced index funds.

"Russell index reconstitutions and short interest", with Aigbe Akhigbe (Univ of Akron), Anna Martin (St. John's University), and Melinda Newman (Univ of Akron). Quarterly Review of Economics and Finance 2022.
Published version Summary

Short interest influences wealth effects around Russell index reconstitutions.

"Passive mutual funds and ETFs: performance and comparison", with Edwin Elton and Martin Gruber (both NYU Stern). Journal of Banking and Finance 2019.
SSRN Published version Summary at the Harvard Law School forum on Corporate Governance

We discuss the determinants of performance for passive index funds and ETFs.

"Are passive funds really superior investments: an investor perspective", with Edwin Elton and Martin Gruber (both NYU Stern). Financial Analysts' Journal 2019.
SSRN Published version In-practice piece

Five ETFs capture most of the variation in ETF returns, and matching portfolios of these five ETFs outperform active funds about 80% of the time before costs and 90% of the time after costs.

"Funds of funds' selection of mutual funds", with Edwin Elton and Martin Gruber (both NYU Stern). Critical Finance Review 2017.
SSRN Published version Summary

Funds of funds underperform when they invest inside their own families, suggesting conflicts of interest.

"Target risk funds", with Edwin Elton and Martin Gruber (both NYU Stern). European Financial Management, June 2016.
SSRN Published version

We comprehensively study target risk funds and compare them to target date funds.

"Target date funds: characteristics and performance", with Edwin Elton, Martin Gruber (both NYU Stern) and Christopher Blake, (Fordham University). Review of Asset Pricing Studies, July 2015.
SSRN Published version

The expenses charged by target date funds are offset by them holding low-cost shareclasses, but TDFs do not earn alpha from their timing or selection of individual assets.

Working papers:

Stock return predictability: consider your open options (with Farhang Farazmand, Aetna)
Investors' views, expressed in individual securities, when averaged are informative about the future path of aggregate market returns. Our predictor of the market, PC-OI, is an average of traders' positions in options on individual stocks, formed by simply dividing the total put open interest by the total call open interest. The totals sum across all stocks. Predictability is strongest when the measure is constructed from a subset of stocks subject to arbitrage constraints. PC-OI has strong in-sample and out-of-sample predictive power, and creates substantial utility gains to a mean-variance investor. The predictive power is not subsumed by the host of existing predictors in the literature. A trading strategy using our measure would have made up to 208% over our sample period, compared to a cumulative market return of 90%.

Fund raw return and future performance
Fund raw return is negatively related to future fund alpha at the annual horizon. This is likely because the stocks sold by low-raw-return funds have their prices pushed down and subsequently outperform. I argue that funds with low raw return suffer "unsophisticated" outflows, forcing them to make unoptimal sales of stocks whose prices then quickly revert. My results have implications for the debate on performance persistence.

Does mutual fund performance vary over the business cycle? (with Anthony Lynch)
Conditional factor models allow both risk loadings and performance over a period to be a function of information available at the start of the period. Much of the literature to date has allowed risk loadings to be time-varying while imposing either the assumption that conditional performance is constant or the assumption that conditional betas are linear in the information. We develop a new methodology that allows conditional performance to be a function of information available at the start of the period but does not make assumptions about the behavior of the conditional betas. This methodology uses the Euler equation restriction that comes out of the factor model rather than the beta pricing formula itself. It assumes that the stochastic discount factor (SDF) parameters are linear in the information. The Euler equation restrictions that we develop can be estimated using standard GMM, which does not use all available data when the mutual fund data starts at different times for different funds and later than the factor and instrument data. We also use econometric techniques developed by Lynch and Wachter (2007) to estimate the Euler equation restrictions taking account of all available factor return, instrument, and mutual fund data. These techniques allow us to produce more precise parameter estimates than those obtained from the usual GMM estimation. We use our SDF-based method to assess the conditional performance of fund styles in the CRSP mutual fund data set. Using dividend yield and term spread to track the business cycle, we find that conditional mutual fund performance relative to conditional versions of the Fama-French and Carhart pricing models moves with the business cycle, and this business cycle variation in performance differs across large-NAV and small-NAV funds for many of the fund styles. We find that the conditional performance is sensitive to whether return is measured in excess of the riskfree asset or a Fama-French 25 portfolio that is matched to each fund style on the basis of Fama-French loadings: performance is typically more cyclical after adjusting for the conditional performance of the underlying stocks. There is some evidence that conditional performance relative to the riskless rate using the Fama-French model of the four styles with the most data, (growth and income, growth, maximum capital gains and income) is countercyclical. However, after adjusting for the conditional performance of the underlying stocks and using the dividend yield as the instrument, only the conditional performance of the two maximum capital gains portfolio remains countercyclical, while the conditional performance of both growth portfolios and the small-fund income portfolio becomes procyclical. When conditional performance is measured using the Carhart model, the evidence for variation in conditional performance for these 4 fund styles over the business cycle is quite weak. Turning to the other fund styles, after adjusting for the conditional performance of the underlying stocks, the energy-sector and utilities-sector portfo- lios typically exhibit countercyclical performance, while the financial-sector, small-cap growth and flexible portfolios typically exhibit procyclical performance.

How would bondholders vote?
When voting in a company's shareholder meetings, mutual fund families which hold more debt than equity in that company vote differently on certain types of propositions than families which hold relatively more equity. I conclude that these classes of propositions do not affect bondholders and stockholders in the same way, and infer how bondholders would vote on these propositions if they had the vote. I find that there are three types of propositions which affect bondholders differently from equityholders: the authorization of new common and preferred stock, the approval of pay-for-performance schemes, and the removal of anti-takeover defences.

	Curriculum Vitae:	adesouza_cv.pdf
	Contact information:	Department of Finance and Economics, Tobin College of Business, St John's University 101 Astor Place Room 220, New York NY 10003.
	Phone:	+1-212-284-7023
	Email:	desouzab@stjohns.edu

	St John's "R club": Materials here
	A SAS tutorial: SAS for finance PhDs
	Published papers:
	"Selection effects in the births of mutual funds". Journal of Financial Research 2025 SSRN Published version
	New funds tend to hold stocks held by other popular funds. Such catering funds underperform. Underperformance can partly be explained by competitive entry: popular strategies see ``too much'' entry resulting in underperformance of all funds, newborn and existing, located there.

	"Are enhanced index funds enhanced?", with Edwin Elton and Martin Gruber (both NYU Stern). European Financial Management 2022 SSRN Published version Summary at the Harvard Law School forum on Corporate Governance
	On average, enhanced index funds do about as well as index funds, but index funds with low expenses outperform enhanced index funds.

	"Russell index reconstitutions and short interest", with Aigbe Akhigbe (Univ of Akron), Anna Martin (St. John's University), and Melinda Newman (Univ of Akron). Quarterly Review of Economics and Finance 2022. Published version Summary
	Short interest influences wealth effects around Russell index reconstitutions.

	"Passive mutual funds and ETFs: performance and comparison", with Edwin Elton and Martin Gruber (both NYU Stern). Journal of Banking and Finance 2019. SSRN Published version Summary at the Harvard Law School forum on Corporate Governance
	We discuss the determinants of performance for passive index funds and ETFs.

	"Are passive funds really superior investments: an investor perspective", with Edwin Elton and Martin Gruber (both NYU Stern). Financial Analysts' Journal 2019. SSRN Published version In-practice piece
	Five ETFs capture most of the variation in ETF returns, and matching portfolios of these five ETFs outperform active funds about 80% of the time before costs and 90% of the time after costs.

	"Funds of funds' selection of mutual funds", with Edwin Elton and Martin Gruber (both NYU Stern). Critical Finance Review 2017. SSRN Published version Summary
	Funds of funds underperform when they invest inside their own families, suggesting conflicts of interest.

	"Target risk funds", with Edwin Elton and Martin Gruber (both NYU Stern). European Financial Management, June 2016. SSRN Published version
	We comprehensively study target risk funds and compare them to target date funds.

	"Target date funds: characteristics and performance", with Edwin Elton, Martin Gruber (both NYU Stern) and Christopher Blake, (Fordham University). Review of Asset Pricing Studies, July 2015. SSRN Published version
	The expenses charged by target date funds are offset by them holding low-cost shareclasses, but TDFs do not earn alpha from their timing or selection of individual assets.

	Working papers:

	Stock return predictability: consider your open options (with Farhang Farazmand, Aetna) Investors' views, expressed in individual securities, when averaged are informative about the future path of aggregate market returns. Our predictor of the market, PC-OI, is an average of traders' positions in options on individual stocks, formed by simply dividing the total put open interest by the total call open interest. The totals sum across all stocks. Predictability is strongest when the measure is constructed from a subset of stocks subject to arbitrage constraints. PC-OI has strong in-sample and out-of-sample predictive power, and creates substantial utility gains to a mean-variance investor. The predictive power is not subsumed by the host of existing predictors in the literature. A trading strategy using our measure would have made up to 208% over our sample period, compared to a cumulative market return of 90%.


	Fund raw return and future performance Fund raw return is negatively related to future fund alpha at the annual horizon. This is likely because the stocks sold by low-raw-return funds have their prices pushed down and subsequently outperform. I argue that funds with low raw return suffer "unsophisticated" outflows, forcing them to make unoptimal sales of stocks whose prices then quickly revert. My results have implications for the debate on performance persistence.

	Does mutual fund performance vary over the business cycle? (with Anthony Lynch) Conditional factor models allow both risk loadings and performance over a period to be a function of information available at the start of the period. Much of the literature to date has allowed risk loadings to be time-varying while imposing either the assumption that conditional performance is constant or the assumption that conditional betas are linear in the information. We develop a new methodology that allows conditional performance to be a function of information available at the start of the period but does not make assumptions about the behavior of the conditional betas. This methodology uses the Euler equation restriction that comes out of the factor model rather than the beta pricing formula itself. It assumes that the stochastic discount factor (SDF) parameters are linear in the information. The Euler equation restrictions that we develop can be estimated using standard GMM, which does not use all available data when the mutual fund data starts at different times for different funds and later than the factor and instrument data. We also use econometric techniques developed by Lynch and Wachter (2007) to estimate the Euler equation restrictions taking account of all available factor return, instrument, and mutual fund data. These techniques allow us to produce more precise parameter estimates than those obtained from the usual GMM estimation. We use our SDF-based method to assess the conditional performance of fund styles in the CRSP mutual fund data set. Using dividend yield and term spread to track the business cycle, we find that conditional mutual fund performance relative to conditional versions of the Fama-French and Carhart pricing models moves with the business cycle, and this business cycle variation in performance differs across large-NAV and small-NAV funds for many of the fund styles. We find that the conditional performance is sensitive to whether return is measured in excess of the riskfree asset or a Fama-French 25 portfolio that is matched to each fund style on the basis of Fama-French loadings: performance is typically more cyclical after adjusting for the conditional performance of the underlying stocks. There is some evidence that conditional performance relative to the riskless rate using the Fama-French model of the four styles with the most data, (growth and income, growth, maximum capital gains and income) is countercyclical. However, after adjusting for the conditional performance of the underlying stocks and using the dividend yield as the instrument, only the conditional performance of the two maximum capital gains portfolio remains countercyclical, while the conditional performance of both growth portfolios and the small-fund income portfolio becomes procyclical. When conditional performance is measured using the Carhart model, the evidence for variation in conditional performance for these 4 fund styles over the business cycle is quite weak. Turning to the other fund styles, after adjusting for the conditional performance of the underlying stocks, the energy-sector and utilities-sector portfo- lios typically exhibit countercyclical performance, while the financial-sector, small-cap growth and flexible portfolios typically exhibit procyclical performance.
	How would bondholders vote? When voting in a company's shareholder meetings, mutual fund families which hold more debt than equity in that company vote differently on certain types of propositions than families which hold relatively more equity. I conclude that these classes of propositions do not affect bondholders and stockholders in the same way, and infer how bondholders would vote on these propositions if they had the vote. I find that there are three types of propositions which affect bondholders differently from equityholders: the authorization of new common and preferred stock, the approval of pay-for-performance schemes, and the removal of anti-takeover defences.