Maybe you can tell which file script which generates the menu items, then I would be able to analyze the whole process and it is possible to solve the problem
It's in admincp/index.php around line 359 (in version 4.1.10), there's this code:
PHP Code:
foreach ($navfiles AS $nav_file => $file)
{
$xmlobj = new vB_XML_Parser(false, DIR . "/includes/xml/$file");
$xml =& $xmlobj->parse();
I don't know very much about character encoding problems, but maybe the problem is that the xml file has ISO-8859-1 for the encoding and your editor is doing something different?