Thanks for the help! I was dealing with this too. Unfortunately the workaround provided has been "fixed" in the most recent release of the kendo ui.
I updated the jsfiddle code to get it to work after a day of trial and error.
It turns out the issue is that when you type invalid text - the <ul> list is filtered based on the text entered. So if you use any of the current methods to set the selected value it will be unable to find any items. using the _filtersource function with an empty string will repopulate the dropdown and repopulate the list again. (you could use the search function but that pops up the dropdown and looks klunky - this solution just changes the text/value appropriately).