RODGER McNair is quietly satisfied. A fund manager with Ivory & Syme, he is pleased that the company has managed to raise #80m for the new Ivory & Syme Optimum Income Trust, a split capital investment trust. The trust, known as Optimum II, follows on from the original Optimum, which was wound up in late March.

The Optimum fund is a useful illustration of how split capital trusts work. Its legal structure is the same as that of a standard investment trust, with fund managers reporting to a board of directors who are, in turn, accountable to the shareholders at the annual meeting.

However, split capital investment trusts are set up for a fixed period, with the new Optimum fund due to be wound up in 2004, seven years after it was launched. When it is liquidated the Preference shareholders will have first call on the assets, but during its lifetime the Ordinary shareholders are entitled to all the income on the underlying assets.

The fixed term helps to keep discounts at bay. The average investment trust is trading at a discount of about 16% to its underlying asset value, a reflection of the high number of trusts in the market. If a trust is going to liquidate its assets in a given time, typically seven years, this is tends to narrow the discount.

If all goes well, the Ordinary shareholders of a split capital investment trust can enjoy an above average rate of income, albeit with a higher level of risk. Those who invested in the original Optimum fund could get their capital sum reimbursed at the end of the trust's life, but in other cases either the terms of the trust or economic conditions can make this impossible.

The Preference shareholders get no income at all during the trust's life, but they enjoy the capital growth of its assets and take on less risk than the Ordinary shareholders. Most of the major fund managers, such as Flem-ings, Henderson and Schroder, have split capital trusts. There are several M&G vehicles, each with differing characteristics.

Who should opt for a split capital investment trust? The Preference shares, which are designed for capital growth, might be suitable for someone who is saving to meet forthcoming school fees or university costs. People can either wait until the trust's term is ended and then collect the proceeds, or the shares can be traded throughout its life in the same way as normal shares.

A trust's Ordinary shares, which carry an above average yield, but might not repay the full amount of capital in-vested at the end of its life, are designed to suit investors, such as retired people, who are looking to receive a good income.

Both the ordinary and preference shares in Ivory & Syme's Optimum II are eligible for inclusion in a personal equity plan (Pep). Sheltering the income and capital gains in this way can be beneficial, especially for higher rate taxpayers.

The Optimum fund's objective is to ''achieve a high and growing level of income for Ordinary shareholders by investing in a blue-chip portfolio of UK equities and equity-related securities'', and its benchmark is the FTSE-100 Index.

No-one has a crystal ball, and the recent sharp falls on Wall Street demonstrate the old adage that what goes up can also come down, but the performance of the first Optimum trust, which ran for seven years to the end of March, gave satisfaction to Rodger McNair, who managed it for the last four years and is the manager of Optimum II.

''We were the top performing split capital trust of our type and 75% of the ordinary shareholders decided to stay with us when we set up the new trust,'' he points out.

Optimum is one of the simpler of the split capital trusts, with shares divided equally between the Ordinary and preference shareholders. Some of the others are far more complex. It is important that anyone who is thinking of putting money in such an investment should really understand the risks and the rewards involved. Because of this, it is essential to get professional advice.

''There is a lot of confusion about this kind of trust and the trouble is that some of the terms used do not really describe the conditions clearly. There are lots of conditions which can have quite a radical effect, and that is where the advisor comes into play. It is easy to be seduced by headline rates of return but then overlook the fact that investors in some trusts will lose their capital,'' warns Ernest Duckett of stockbroker Tilney & Co.

He says that in some circumstances the right split capital trust can have a part to play. ''Someone who is earning well and paying tax may want to take advantage of the zero coupon Preference shares to build up capital, possibly for school fees or as part of a retirement strategy.

''It is important to use the #6500 capital gains tax annual allowance, and this can be done by 'bed and breakfasting' the investment in the split capital trust. Once someone has accumulated capital, it might be right to transfer to the income producing shares,'' Mr Duckett proposes.

Using split capital investment trusts in conjunction with a Pep can also be a good strategy, he suggests. ''Once capital has been built up using a pep it can, under current legislation, be transferred into shares and the income is then free of tax. it is one of the best things which a financial planner can do for his or her client.''

It is important that a prospective investor in this type of trust should have a clear idea of his or her needs.

''Sometimes people say that they are looking for something which will help them meet school fees in five years and we advise a capital growth plan, and then a couple of years later everything has changed and they are looking for something else.

''Split capital trusts have done well since we were thrown out of the exchange rate mechanism, but before then a lot of them looked pretty sick. The ones which look too good to be true often have a nasty condition lurking in the detail,'' Mr Duckett cautions.