See https://udn.unrealengine.com/questions/505632/view.html for more details
-Have a mesh with 3 sections and 3 materials, assign section 1 to material 1 and section 2&3 to material 3.
-Place multiple instances of the static mesh in the map and use the hierarchical Lod Outliner to "Generate proxy meshes" with the default settings ("merge material" should be enabled).
-The generated meshes/material in the HLOD folder will have strange black areas instead of the material 3.
Expected: No black areas, (if you assign material 2 to section 2, you will get the proper result for this config)
There's no existing public thread on this issue, so head over toAnswerHub just mention UE-77275 in the post.