Photo by Víctor Elvira Ávalos on Unsplash

The art fund inquisition series continues with Javier Lumbreras of Guernica V and Artemundi.

Based in Madrid, Javier Lumbreras is the CEO and Chairman of Artemundi, an art investment company that he founded in 1989. Decades later, during the Great Recession and in the aftermath of the Lehman Brothers collapse, Javier founded the Artemundi Global Fund, an art fund that operated from 2010 until 2015 and ultimately achieved an average net return of more than 17% for its investors. 

When Covid hit, Javier saw another opportunity to leverage the economy’s brutal ups and downs, and once again connect investors to the art world — and the Guernica V fund was born. To be clear: the V is not a roman numeral — it actually stands for vulture. As any critic of distressed investing would be quick to point out, vultures feed off of literal carnage, picking apart carcasses of their deceased (or soon to be deceased) prey. 

It would make sense, then, that the Guernica V fund is intentionally opportunistic, some might even say predatory, seeking out significant, yet underpriced masterpieces whose value Javier believes will rise again once the market stabilizes in a post-pandemic economy. 

His intuition is backed up with market research, historical data aggregation from his previous fund, and other signifiers of an artist’s market potential. In fact, many of the artists Javier lists as attractive investments are women — unsurprising, given that women have always been historically undervalued in the market, although some have made major gains in recent years. 

A lifelong collector himself, Javier is also a certified appraiser (AAA), the author of the book The Art of Collecting Art, and is currently building Collegium — a collecting museum in the city of Arevalo, Spain, dedicated to archival practices, production, and research. 

We spoke to Javier about his motivations and market strategies, the criteria his fund applies when assessing potential artworks to acquire, and why the collective investing model is advantageous for art lovers and investors alike. 

This interview has been edited for length and clarity. 

Javier Lumbreras of Artemundi and the Guernica V art fund.

AA: Explain a bit about your background, Artemundi and the Guernica V art fund.

JL: My background is in finance and business, but I also studied art history at the New York Institute of Fine Art. I was very active in the Connoisseur’s Circle as a patron of the Institute. Philippe de Montebello, the former director of the Metropolitan Museum of Art, is a dear friend and someone who taught me a lot as I started out collecting and supporting art institutions as a patron.

So, I've been collecting for more than 35 years. Collecting is also something that I grew up with because my family actively collects. Initially, I was really interested in 19th-century paintings; but then I started collecting contemporary art. I established a gallery in 1990, which I owned for several years, dealing mostly 19th century and modern art on the secondary market. However, the gallery’s exhibition program also featured very young up-and-coming artists, so I’ve always been interested in the entire spectrum, from historical works to contemporary art. 

I’ve always been very closely related to artists and investing in art, not just from a financial perspective, but also from an emotional, psychological, and intellectual perspective. I’ve also been active in other businesses as well, mostly real estate and a few banking businesses. 

When the 2008 financial crisis hit, I thought, “How can I put all of this financial knowledge to work within the art industry?” All my life I've really been collecting for the purpose of collecting, not really for the purpose of reselling. So, after we sold the banking business in 2008, I decided that I wanted to institutionalize the model of bond investing for the art world. 

To be clear: I’m not talking about buying some random painting every now and then — rather, the model is to buy a portfolio of works, thereby diversifying the risk and institutionalizing the investment, and then bringing in other people to invest in the fund. So that realization led to the creation of our Global Fund, which commenced operations in April of 2010 and ended in 2015. That fund realized a 17.07% return for our investors.

A fund is a very simple concept, but — don’t get me wrong — it's not easy to run. Still, there are very simple rules that we follow and which have served us well:

  • Buy low, sell high, as much as you can (of course). 

  • Really understand every single risk and implement countermeasures. 

  • Keep the administrative costs to a minimum. 

  • Cut out as much of the intermediary fees as possible. (We work very closely with a group of advisors, which we call the Management Advisory Council, and we pay commissions of 5%).

  • Set up the fund’s strategy by starting with the exit strategy and work backward. 

  • Understand the behavior of the asset and how it performs.

AA: How do you vet your investors and what’s the minimum investment that Guernica V accepts?

JL: We only work with accredited investors, meaning that they have bankable assets in excess of half a million dollars — this amount varies, but it has to be in compliance with the SEC rules. We also file as a 506(c), which allows us to do some marketing to present our product to potential investors. The minimum ticket to invest in the Guernica V fund is $200,000. 

We have always been more interested in recruiting investors from outside the art world, as that brings new money into the art business and we're not stepping on anybody's toes, so to speak. 

However, it's also a little bit harder to get non-art people into an early investment fund because they’ve never personally experienced buying a painting from a gallery for $10,000 that’s now worth a couple of million dollars. So, working with collectors, in that sense, is usually easier. I don't need to convince them that art can be a good investment. 

We are also looking for savvy investors. Maybe they want to put 5% or 10% of their portfolio into art as an asset, because it's a nice way of diversifying, and art is an asset that is never going to be worth zero — unlike some companies or startups that disappear overnight. 

Our due diligence process to buy an artwork is very thorough — we assess quality, rarity, condition, provenance, price, all of those things, and even much more. We’re also diligent in terms of KYC (know your client), and we check into AML (anti-money laundering), etc. — we want to know who's the ultimate beneficiary of the money we're transferring for an artwork. 

We are very, very careful in terms of who we buy an artwork from. We will not agree to deal with someone who is not making any disclosures, lest the money ends up in the hands of someone who's on a sanction list because then the government could seize our accounts. We have a fiduciary duty to our investors and therefore we must be very, very careful to not allow those things to happen. 

I'm the chairman of the Art Fund Association and, I can tell you, there are not that many funds. Most funds also keep it very quiet and don’t report their returns. We like to report our numbers because we believe in transparency. 

AA: How does the fund source art to acquire?

JL: We are very fortunate because of our success with the first fund — we learned a lot from building that fund and we can apply that knowledge and experience to every fund we build going forward. 

So, there are some basic principles which we are still respecting; however, in terms of strategy, the Guernica V fund is very different. First of all, this fund is a lot more opportunistic. In a sense, COVID created a lot of dislocations in the market — there's still a lot of people actively looking for important pieces, but there are also some people that urgently need to sell their art.

The way I see it, those people that need to sell have three options: 

Option one: They can go to an auction house and they know they're leaving about 25% of an artwork’s fair market value on the table — which is the auction house’s commission — it’s as simple as that. There are also risks involved with the auction house. The risk can be that you have your work “BI-ed” (bought in), and the BI means you're not going to be able to resell it for a long period of time, or you're going to have to knock another 20% off the price. At that point, you’re looking at a price reduction up to 40% below the fair market value.

Option two: You can go to a gallery, but they will usually require a consignment period of six months to one year. The outcome is uncertain, and galleries have risks. For example, the gallery might also have liabilities that you don’t know about, and one day they might shut the doors, and your inventory might get stuck inside. 

Option three: You can go to a bank, and you can get a loan, but that's it. Lending loans can be close to 10%. And if you're paying 10% on top of the rest of your debts, that’s not ideal. 

The fund exists to solve this problem. We position ourselves in a very niche role, to the extent that we’re compared to the rest of the market players. We're not brick and mortar. In fact, we are completely opposed to the brick-and-mortar model. 

I think that's what makes our buyer strategy successful. Obviously, we take the risk of ownership, and we need to be very careful. That being said, there is enough statistical and financial analysis that's been done on certain artists’ markets over several decades, if not 100 or 150 years, that we can look at these results and make assertions in terms of how works by these artists are going to perform. That’s one reason why we don't buy contemporary art — not even late 20th-century art.

AA: What are some pieces that Guernica V is considering buying for the fund?

JL: Let me just give you some examples. Earlier this summer, we looked at a phenomenal work by Lee Krasner. We also looked at some other important works by female artists — Ellen de Kooning and Joan Mitchell. Then we’ve looked at a couple of Picassos, Pierre Soulages, Calder, Francis Bacon, Sigmar Polke, and a major work by Rothko.

I like to hold onto an artwork for three years, but we could also hold onto a piece for as long as the fund allows — five or seven years. I like to rotate at least 25% of the inventory. From our years of running the first fund, we found that to be a perfect formula, because it allows for the reinvestment of the capital plus the proceeds. And it creates a compounding effect, which is what really makes the fund grow. Otherwise, it's very hard to get returns over 12%, and we're aiming at around 17% or so. 

AA: How do you determine that an artwork is worthy of the fund? 

JL: Ultimately, it's just about assessing the investment opportunity. For example, yesterday I was looking at Picasso’s work made exclusively in 1964. According to our price index, a 1964 Picasso has gone up in price by 10% per year. So, I located one particular Picasso, and traced it from the first time it was sold to Beyeler (a major collector), then to an auction house, then to a second auction house, and then to us.

This particular Picasso had an average return of 12%, so it performed a little better than the index and we were able to buy it a little bit below fair market value — that’s the investment opportunity. 

So, now we just need to take every possible risk into consideration, and we do a very good job of disclosing the risk in our PPM, i.e. our investment memorandum, and we apply a lot of countermeasures to negate those risks.  When you have a portfolio with 150 transactions, however, if one asset doesn’t achieve the return that you projected, the performance of the entire portfolio offsets that risk. That’s the beauty of the fund. 

There are many ways to invest in art, from working with private advisors, to buying from galleries and auction houses, to investing in a structured fund such as Guernica V. Artwork Archive is committed to providing a range of educational materials, interviews and other resources to the public, in order to support art investors and collectors at every stage of their journey. To view our previous art fund coverage, click here.

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