Editor should visually warn the user that this feature doesn't work with Nanite, or that the Nanite Preview mesh needs to be enabled (or forcibly enable it when they attempt to use this option), otherwise the feature just looks broken.
Example image comes from the AncientGame sample
1. Open a Static Mesh asset
2. Ensure "Enable Nanite Support" is disabled (apply changes if needed)
3. Toggle Highlight/Isolate for a material slot, editor will highlight/isolate as expected
4. Enable "Enable Nanite Support" and apply changes
5. Ensure Show Nanite Fallback Mesh is set to False (Ctrl + N?)
6. Toggle Highlight/Isolate
7. Nothing happens.
There's no existing public thread on this issue, so head over to Questions & Answers just mention UE-168599 in the post.