Bug fixes.
Oh yeah, this only applies for creation, so the instances are created in the same way they show up in the editor.
I guess it is bug, since changing the z order of the parent and having all the children change accordingly seems like a very common and useful use case.
Please, file an issue in our tracker with an example project showing the problem and how you expect it to work. This is a fairly new feature, so we are still working on it.