MSTS uses the pivot point for the ‘MAIN’ or parent object for object placement and rotation in MSTS.
The model is moved and rotated around this pivot point in the MSTS world.
The track that MSTS uses to guide the rolling stock is not the 2 rails that you see in game but an invisible centre line on each track section. This ‘centre line’ is not curved on curves but a number of straight sections (like a chord (
http://en.wikipedia.org/wiki/Circle)). On a sharp curve, if the number of ‘centre lines’ are not close together the centerline cuts across the inside of the curve. As the pivot point for the model follows this line it makes the loco ‘cut’ the corner as shown in the screen shot above.
Being a 0-4-0 my suggestion would be to make sure the pivot point for the MAIN part is centred between the two wheel sets rather than the centre of the model itself. It may not eliminate the problem but may help minimise the amount the loco side slips on the track work..
Another possible option (untested by myself) is to add invisible bogies to the model front and rear. I suspect bogied stock uses the bogie pivots (as opposed to the MAIN pivot) to traverse the invisible centreline. If you created invisible bogies these may follow the track work a little better minimising the side slip.
If I’m not mistaken, if you view the track work in the Route Editor the grey line overhead the track work is and indicator of what MSTS uses to move objects around in the MSTS world. If it is the case then have a look at the short radius curve in RE and you will get a better idea of what your model is trying to traverse.
Hope this helps.