That does indeed sound like incorrect behavior.
I tried reproducing it on UE 5.4, 5.5, and 5.6 preview, but I can’t seem to reproduce it. These are my steps, can you see if they diverge from yours?
- Create a new empty Material and a new empty Material Function.
- Right click the Material and click “Create Material Instance”.
- Open the Material Function and put a Constant4Vector to have an output.
- In the Material, drag in the Material Function and connect it’s Output pin to the Base Color pin of the Material.
- Save the Material, the Material Function, and the Material Instance assets.
- Reference viewer shows Material Instance -> Material -> Material Function dependency chain.
- Delete the Material Function from the Material, save the Material.
- Reference viewer only shows Material Instance -> Material dependency chain, Material Function doesn’t have any dependencies or references.