NEW YORK (REUTERS).- Fund firm Castlestone Management is betting that late Picassos and paintings by U.S. pop artist Robert Indiana will help revive performance, after a tough first year in which its art fund fell more than 20 percent.

The $20 million Collection of Modern Art fund, which holds 27 works including Andy Warhol's "Five Guns" and Roy Lichtenstein's "Nude in an Apartment," owns Picasso's 1967 crayon work "Adolescents, aigle et ane" which it bought last year for 220,000 pounds ($322,100).

"Picasso's post-war works are cheaper but have become more important lately due to an exhibition in the (UK's) National Portrait Gallery last year," Constanze Kubern, Castlestone's senior art adviser, told Reuters in an interview on Thursday.

The fund's performance has suffered since launch last April as prices in the art market have fallen. Between April and December last year the fund's value fell 21.99 percent, while in the first four months of this year it is up 0.12 percent.

The huge 5-10 percent transaction fees that are commonplace can be a drag on performance of art portfolios, but the Castlestone fund tries to recoup these by exhibiting its works in museums.

Last month the fund, which typically buys works of art for between $400,000 and $800,000 and holds them for five to eight years, purchased 81-year-old Indiana's "Non-ending Nonagon" for $190,000.

"He's a key player in pop art. The market is undervalued and we expect it to go up," said Kubern. "Due to his elderly age it's a good investment."

Artists' works tend to appreciate in value following retrospective exhibitions after their death.

Prices of post-war art, which tends to encompass artists who are dead or no longer producing, fell around 30 percent in 2008 but have recently begun to recover, mirroring an improvement in the wider art market that this week saw Christie's offer a Monet worth an estimated 30 to 40 million pounds.

While institutions such as pension funds have slowly been increasing their tiny weightings in alternative investments such as hedge funds and private equity in recent years, they have almost nothing invested in the niche world of art.

However, Castlestone thinks institutions could start investing because, like gold, some art can hold its value at a time when many governments have been increasing the money supply to stimulate growth.

Castlestone chief executive Angus Murray said institutions were now "contemplating" investing and could commit money in the next year or two.

"Gold and art show unique characteristics," Murray said. "People will focus more and more on the devaluation of money as they see how much quantitative easing has occurred.

"People will ... focus on asset classes able to protect them from this devaluation of money," he said. "(They) will have more confidence as they see a revival in price terms."