Include/exclude search not working for parent groups

Include/exclude custom search does not seem to be finding contacts who have added status of 'smart. This is when searching for parent groups. I have replicated this on the demo site. Workflow followed on demo:

• Created group 'test parent group 1' - added 2 contacts
• Created group 'test child group 1' and selected the parent of this group as 'test parent group 1'- added 2 contacts
• Ran an include/exclude custom search with the criteria simply including this parent group.
• Results are the two contacts I have manually added, the 2 which should be included as they are in the child group do not appear.

I found this when getting no results when trying to include a parent group on a client's site (all group members have status of 'smart'). Interestingly, when I included this group in a mailing it recognised all the contacts within this group. Not sure what the difference is between include/exclude custom search and the one used in mailings?